It doesn't matter because no banks have been anywhere near the reserve requirements that were previously in effect. The change to the "ample reserves" regime is just a tacit admission that lending is not functionally limited by reserve ratios in the U.S. at the moment.
I'm sure you know, but (based on discussions that took place at the time of the announcement back in 2020) I know a lot of people who leapt directly to the assumption that the removal of the reserve requirement was so that banks could "create even more money out of thin air than they were previously allowed to do".
I hope you don't mind me clearing that misconception up, even if it's not for your benefit!
The capital requirements result in something similar. In the end, a loan by JPM of $100 is backed by about $90 of deposits and about $10 of JPM equity. In practice JPM has more capital than that, but there is some adjustments to the loan amount given the risk of any loan etc.
So, JPM needs more equity if it wants to ramp up it's loans.
It's strange if you have a particular conception of money. If you think of money as a social technology used to improve aggregate well being, then it's just a property that empirically makes sense. Private banking, with effective regulation, has proven to be a fairly effective way to stabilize the business cycle and unblock growth
Sure, it helps to improve the aggregate well being of those who participate in the fake economy at the expense of those who participate in the real economy... Great for crooks!
> it helps to improve the aggregate well being of those who participate in the fake economy at the expense of those who participate in the real economy
This is financial Luddism. Just because something is unfamiliar doesn’t mean it’s bad.
Private money creation is necessary for a growing, dynamic economic condition. (The problem is simpler in a static or simply cyclic economy.) Growth is heterogenous. To preserve price and bank stability, you want money created where it’s needed and not in excess where it’s not. In times past, this was largely geographic: banks in the West created money faster than banks in the agrarian South. Today, the divisions are more complex: a bank serving tech companies probably creates more deposits than one serving aging manufacturers.
Centralising this function in a state apparatus has been proposed. But the central bank would have to run and then implement an economic model. Decide where and for whom to create money. This is central planning. It has a poor track record. (This is also the argument against bank concentration [1].)
The way the banking system works now, it mostly creates money where it's not needed. That's why there is such high inequality which keeps growing. New capital is just deployed to chase old capital. It creates anti-competitive moats which prevent money from going where it's really needed and where it could be used most efficiently. It makes bureaucracy viable and economic efficiency non-viable.
The vast majority of people who benefit from bank loans are not value creators, they are rent-seekers. Value creation necessarily requires taking calculated risks and banks these days aren't willing to take any risk.... They need full collateral. It's all about existing collateral. In the short term, the safest investment you can make is to build a moat around your existing investment... But if everyone in the economy is busy building moats (because that's the only activity which is sufficiency safe for banks to fund), there will be nobody remaining to do useful stuff which moves the economy forward.
This is less of a problem with the way that the monetary system operates and more about policy choices made by central banks and politicians after the 2008 financial crisis.
Debt is a promise to return something if value tomorrow for something of value today. Too many promises have been made than will ever be able to be repaid and promises are going to be broken.
Regulators and politicians have three choices on how to deal with broken promises. The first is through bankruptcy courts where a judge allocates losses according to the law. The second is through taxes where politicians take money from one group to honor promises made to another. The third is to drive inflation and break promises by returning dollars that have less value then promised.
This choice that central banks made was the latter by trying to drive up inflation. The side effect of the policy choice however it has tended to favor speculators and the well connected versus other policy paths.
I’m not entirely sure those other paths would have been better. Broken promises tend to be what drives revolutions and the best path is to not make promises that you can’t keep.
It's worth taking a look at the balance sheet of a bank. Most of them will have credit card receivables. A lot of them. No collateral. They'll also have all kinds of unsecured loans.
Banks were never taking much in the way of risk. It's not what they are there for. They are and always have been there to take depositors money and make low risk loans. It is what it is.
It’s the defining characteristic of a banking license. Like any license it permits activity that would otherwise be illegal. In this case, creating new dollars.
"On the hook" right up until the point they're about to go bust, then they hand over responsibility to the government to rescue them from their rampant speculation.
Basically, yes. There are “capital” requirements, but as far as I can tell that’s basically just laundering their loan business by trading equity with peer banks, which are of course largely based on loan performance.