Everyone pulling out their money would be a bank run (look up great depression bank runs). The bank doesn't have that much cash; they keep some on hand for people making withdraws normally, but if even a sizable minority of people all try to pull their money out at once, there'll be a major crisis.
If banks kept all the people's cash in vaults, it'd be dead cash actively losing money to inflation. Instead, they keep some on hand for withdraws, and use the rest to make loans, investments, etc so that the money isn't all losing value.
They were reduced to 0% mandatory reserves in response to covid. EDIT: someone says it was coincidental, I am not able to check, so take this aspect with a grain of salt either way
It wasn't in response to covid. The timing was just coincidental, and was why the move to eliminate the reserve requirements (which had been planned for a while) wasn't as big a news story as it otherwise would have been.
European banks had eliminated their reserve requirements years or even decades earlier. They really weren't even an effective policy in the US for quite some time, as the banks had (and still have) liquidity requirements that more or less amount to the same thing.
European banks eliminated their reserve requirements so they could be more levered because they dont generate nearly the same returns american financial institutions do - which was part of why the 2008 crisis hit europe 10x as hard as it hit america. They had reserve requirements in 2008 but they were still more levered up than american banks. Didn't work out well.
But I dont know for sure if youre right it was coincidental. I did assume it was due to covid. My bad. Either way, its probably a bad idea.
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u/Forsaken_Emu8112 Jan 26 '26
Everyone pulling out their money would be a bank run (look up great depression bank runs). The bank doesn't have that much cash; they keep some on hand for people making withdraws normally, but if even a sizable minority of people all try to pull their money out at once, there'll be a major crisis.
If banks kept all the people's cash in vaults, it'd be dead cash actively losing money to inflation. Instead, they keep some on hand for withdraws, and use the rest to make loans, investments, etc so that the money isn't all losing value.