[rahimnathwani]

This doesn't make any sense. When a bank creates a loan of $X and disburses the loan into the borrowers account, two things happen:

1) The bank's loan assets go up by $X 2) The bank's deposits go up by $X

Deposits are part of 'net transaction accounts'[0] so the bank would now need to hold 10% of $X in additional cash (e.g. in their vault).

So, it seems like the bank can create a loan of $X with just $0.1X of cash. Hang on, though. This assumes that the borrower just keeps the money in his bank account, which is unlikely. When she withdraws the money to spend it, the bank's reserve requirements go down by $0.1X (good) but they also need to pay out $X of cash (bad). So, it really did cost them $X to make $X of loan.

Now, if they have a CDS related to this loan, then they are insulated from the risk of default. But, how is that relevant to reserve requirements?

[0] "Net transaction accounts are total transaction accounts less amounts due from other depository institutions and less cash items in the process of collection."

[laotzu]

I'm confused myself but thanks for debating. I was wrong about the 0% reserve ratio applying per account rather it is the sum total of all accounts held by the bank.