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by AnthonyMouse 2283 days ago
The Fed just cut the banks' reserve requirements to zero, which means they don't require any deposits in order to make loans anymore. They have no use for your money. That's why you may have to pay them to hold it for you.
1 comments
Doingmything123 2283 days ago
My understanding of the reserve requirements were that they set how much of the total amount deposited the banks had to hold on to at any given time. Setting the requirement to zero means that banks can deploy all of the capital they have in loans. If anything, shouldn't this be the other way around? They want more deposits because they can use the full amount instead of say 90%(holding on to a 10% reserve) or whatever the number was and make more money while paying savers the same amount. Or are you relating this to interest rates going to zero which seems like a better point for why banks wouldn't need deposits? Though the amount of interest savers get from banks is close to zero anyways right? So it still seems to me that banks want as many people deposited with them as possible since they can now use all of the money given to them.
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AnthonyMouse 2283 days ago
Suppose you take your $5000 in cash into the bank and deposit it. They put the cash in their vault and credit your account with $5000. Now they have 100% reserves.

Alice, Bob and Carol come into the bank and each take out a $5000 loan. The bank credits each of their accounts with $5000, but there is still only $5000 in their vault, so now they have 25% reserves. As long as the reserve requirement is below 25%, this is fine. If the reserve requirement was 30%, they couldn't make that many loans.

With a 0% reserve requirement, they could loan your $5000 to a million different people and have 0.000001% reserves and still be allowed because 0.000001% is more than 0%. They could send you away and the bank manager could deposit a dollar and they could make unlimited loans from it. They have no use for your money.

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Doingmything123 2283 days ago
Ah, so reading up on this, it really is unintuitive. I guess the only worry then is if this will bite tax payers. Thanks for the expanation
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