Say you have a bank account with $100 in it. At 100% reserve requirements, the bank must have that $100 actually in its possession at all times. This is very safe, because you are guaranteed to be able to withdraw your money in the event of a bank run. However, an economist might believe this is suboptimal because the $100 is just sitting there doing nothing rather than "circulating in the economy". Thus the concept of the reserve ratio is born: banks don't keep that $100 around, but instead lend a percentage of it out or do whatever weird trades they want to do to make money. This is called fractional-reserve banking.
Before this change, reserve requirements in the US were at 10% which means the bank could lend out $90. Now in general this is problematic because if everyone were to try to withdraw their money at once, the bank could not produce it. Thus we have the FDIC, which is a government program that insures bank account deposits up to $250k so people don't lose all their money if a bank run happens. A cynical way of looking at this is that taxpayers are on the hook for the bank's bad behavior if they go bust, and the lower the reserve ratio the more likely the bank is to overdo it.
Things also get really weird when other banks are in the picture. If you deposit $100 at bank A which has 10% reserve ratio, it will lend out $90 - so total money in the system is now $190. That $90 might end up deposited at bank B, which also has a 10% reserve ratio, so it lends out $81 making the total amount of money in the system $190 + $81 = $271. This process continues until it approaches the value of principal * (1 / reserve ratio), so in our case $100 * (1 / 0.1) = $1000 [0]. At 0% this means technically infinite money can be lent/created, although banks will presumably keep some percentage as reserves due to internal risk requirements (interesting assumption, I know).
Reserve requirement ratios are viewed as one of the levers the government can use to help steer the economy. Reducing the reserve requirement ratio has the effect of increasing the overall money supply, which has some nonlinear effect on the economy that the government wants to happen. This move to 0%, in addition to various other recent moves by the federal reserve, are all geared toward flooding the economy with cheap easy money to prop it up. They will all fail.
> However, an economist might believe this is suboptimal because the $100 is just sitting there doing nothing rather than "circulating in the economy".
A short-sighted economist, maybe. What needs to circulate is goods and services, not money. If you have $100 in the bank (or stuffed in your mattress), that means you produced stuff worth $100 more in total than what you consumed. Those extra goods are already being put to productive use. If your savings stay safely locked away and out of circulation that just means prices will be a bit lower due to the decrease in the money supply, which benefits everyone else. And when you take that saved money and spend it later your prices will be a bit lower, too, which is your reward (interest) for basically letting everyone else borrow the value of your money for the time you had it out of circulation.
If you can take your savings and invest them in some venture likely to provide a real return—after factoring in inflation and overhead—that would obviously be better than just stuffing the money in your mattress. However, taking money out of circulation is still better for the economy as a whole than "investing" it in something that can be expected to lose value, because that would divert goods and services away from better investments. If the money supply were held constant than you could treat price inflation or deflation as indications that we need more or less targeted investment, respectively. Unfortunately that isn't the case, so we're missing a key economic signal.
> Fractional-reserve banking is the most common form of banking practised by commercial banks worldwide. It involves banks accepting deposits from customers and making loans to borrowers, while holding in reserve an amount equal to only a fraction of the bank's deposit liabilities. Bank reserves are held as cash in the bank or as balances in the bank's account at the central bank. The minimum amount that banks are required to hold in liquid assets is determined by the country's central bank, and is called the reserve requirement or reserve ratio. Banks usually hold more than this minimum amount, keeping excess reserves.
It's a mighty pillar of our global economic systems or the biggest scam ever or both depending on who you ask.
Anyway, if I understand correctly (and I don't, IANAEconomist), now the fraction is zero. But I don't know what that means and I suspect few do. It sounds like it means that banks can just write loans all day long and "poof" money into existence, but I've been told that that is somehow not the case. Higher economics is indistinguishable from numerology (in terms of semantic analysis) to me, so I shouldn't comment further. Hopefully someone more knowledgeable will show up and read the tea leaves for us.
It's now legal for a bank with $1,000,000,000 in deposits to have absolutely zero cash available to pay out those deposits if people want their cash out.
Before this change, reserve requirements in the US were at 10% which means the bank could lend out $90. Now in general this is problematic because if everyone were to try to withdraw their money at once, the bank could not produce it. Thus we have the FDIC, which is a government program that insures bank account deposits up to $250k so people don't lose all their money if a bank run happens. A cynical way of looking at this is that taxpayers are on the hook for the bank's bad behavior if they go bust, and the lower the reserve ratio the more likely the bank is to overdo it.
Things also get really weird when other banks are in the picture. If you deposit $100 at bank A which has 10% reserve ratio, it will lend out $90 - so total money in the system is now $190. That $90 might end up deposited at bank B, which also has a 10% reserve ratio, so it lends out $81 making the total amount of money in the system $190 + $81 = $271. This process continues until it approaches the value of principal * (1 / reserve ratio), so in our case $100 * (1 / 0.1) = $1000 [0]. At 0% this means technically infinite money can be lent/created, although banks will presumably keep some percentage as reserves due to internal risk requirements (interesting assumption, I know).
Reserve requirement ratios are viewed as one of the levers the government can use to help steer the economy. Reducing the reserve requirement ratio has the effect of increasing the overall money supply, which has some nonlinear effect on the economy that the government wants to happen. This move to 0%, in addition to various other recent moves by the federal reserve, are all geared toward flooding the economy with cheap easy money to prop it up. They will all fail.
[0] https://www.economicshelp.org/blog/67/money/money-multiplier...