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A comment on SVB Depositors, Investors Tried to Pull $42B Thursday. Parent comment
Suppose your assets are 50 dollar reserves and 50 dollar investments.
The liability side of your balance sheet is 20 dollars of equity and 80 dollars deposits. For a leverage ratio of 1:4.
If the investments drop 10 dollars in value (to 40 dollars), your leverage ratio goes to 1:8.
If the investments drop 20 dollars in value (to 30 dollars) your leverage ratio goes 1:infinity.
If your investments drop below 30 dollars (say to zero), you are insolvent.
Yes, reserves are a tool that banks can use. But that doesn't mean that legal minimum reserve requirements are a good idea.
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Suppose your assets are 50 dollar reserves and 50 dollar investments.
The liability side of your balance sheet is 20 dollars of equity and 80 dollars deposits. For a leverage ratio of 1:4.
If the investments drop 10 dollars in value (to 40 dollars), your leverage ratio goes to 1:8.
If the investments drop 20 dollars in value (to 30 dollars) your leverage ratio goes 1:infinity.
If your investments drop below 30 dollars (say to zero), you are insolvent.
Yes, reserves are a tool that banks can use. But that doesn't mean that legal minimum reserve requirements are a good idea.