[cabaalis]

I am no economist. What is being solved here? Allowing loans? Who will take out loans in the economy as it is?

I'd think a reserve at the banks is a good protection of solvency, and should be increased instead of decreased. Is my layman interpretation completely wrong? It feels like they ran out of bullets and have thrown the gun.

[mech1234]

Typically, For every dollar a bank "keeps" in your bank account, they are allowed to loan out some fraction of the dollar. Let's say that this is usually 90 cents. The amount of cash your bank actually has on-hand is 10 cents. This process is known as fractional reserve banking. Now, with 0 reserve requirement, the bank can lend out the whole dollar.

Fractional reserve banking has produced a tremendous amount of wealth for the world over recent centuries. It encourages assets to be used in a productive manner rather than hoarded, which is essentially wasteful.

Typically, the loans get paid off to the bank over time, and the bank originates new loans to continue to make a profit. Currently, there are two systemic risks:

1. If borrowers begin to default, the bank still must cover its expenses. Under stressful circumstances, they would normally not be allowed to draw down their reserve to meet their expenses. This change allows this. Once the economy recovers, the reserve requirements will be reimposed.

2. It encourages banks to continue issuing new credit to borrowers. This keeps economic activity flowing and prevents a situation where borrowers have nowhere to turn to find money to keep their business afloat until profitable times return.

[Loughla]

All of this looks good, except one statement that I'm willing to bet is false:

>Once the economy recovers, the reserve requirements will be reimposed.

I bet they aren't, until something awful happens, again.

[mech1234]

Reserve requirements are typically made more stringent while the economy is doing well. The history of these changes by the Fed is available at the link below.

https://www.federalreserve.gov/monetarypolicy/reservereq.htm...