The worst time to require increased reserves is during a liquidity crisis, as reserves suck up liquidity.

I agree, but a crisis is the ideal time to examine the root causes that led to the crisis and to re-examine the assumptions upon which the environment that led to the crisis were based on.

Fractional reserve central banking is a giant Ponzi scheme that leads to bank failures again and again. Any business that will fail if 20% of its customers use the product as intended (withdrawing funds from a demand account) is fundamentally unsound.

If we fail to learn from our mistakes we are destined to repeat them.

You don't talk about dietary habits when a person is having a heart attack

I do like your analogy. Here is another:

If smoking led to the patient’s heart attack and the patient is still smoking on the hospital bed, I think it is justified for the doctor to tell the patient to stop smoking.

If a heart attack patient were still smoking in their hospital bed, how much impact would this have on their treatment and recovery in the immediate aftermath?

If I were the doctor and the patient had survived the heart attack I would absolutely do my best to get him to stop smoking in order to prevent the next heart attack.

In other words if you don’t fix the root cause of the heart attack (or fundamentally unsound fractional reserve banking system) you are effectively begging for another failure down the road.

By the time they survived the heart attack, the crisis is over though?

But the root cause of the crisis still exists. If you only address the symptoms without solving the root problem that caused the symptoms, then the crisis is likely to happen again.

There isn’t a liquidity crisis. The government debt that triggered all this is highly liquid. The banks have a solvency crisis. Hence the cash giveaway disguised as a lending program.

Kinda right?

A bank which is insolvent/bankrupt but has plenty of cash on hand doesn’t need this, only banks which are both insolvent AND need to recognize that fact because they don’t have cash on hand to meet current withdrawals?

Otherwise they can keep Wil-E-Coyote’ng off the cliff for quite awhile longer as long as they don’t mark to market.

Changing the reserve requirement won't fix this. Banks no longer have the deposits, they used those customer deposits to purchase debt (t-bills, corporate bonds, mortgages, etc.).

The debt they own has decreased significantly in value since because who wants to own a mortgage at 3% when new mortgages are at 6-7%? The sooner banks are forced to sell this debt, the more they lose.

Thus increasing the reserve requirement would force early sales of debt and make the bank go further into the red.

To be clear, I agree that you can’t raise reserve requirements now, but zero reserves was supposed to be a temporary Covid measure. We are here in 2023 and the banks are all insolvent having speculated using 100% of depositor funds as collateral.

The Fed tells us everything is fine and we shouldn’t worry our pretty little heads. The Fed is the problem here. They are too close to the banks they regulate. This is yet another example of regulatory capture. Propping up a failed fractional reserve banking system now featuring no reserves.

I don’t want innocent depositors to lose their money but I do think it is high time to reconsider this experiment that is the Federal reserve.

There are no temporary measures. Passports were a temporary measure

So was income tax (agreeing with you)

The goal was to encourage the banks to speculate using 100% of depositor funds as collateral. How could we have ever seen a problem coming?

> To be clear, I agree that you can’t raise reserve requirements now, but zero reserves was supposed to be a temporary Covid measure.

Anyone who thought anything about COVID was temporary was deluded. When was the last time any temporary measure actually expired and stayed that way?

What regulators should have done starting a year ago, and can still do now, is force banks to restore the mark to market value of their equity cushions via share sales.

I agree with that as a short-term strategy to address the immediate crisis. However if we want to avoid more crisis in the future I think it is necessary to re-examine the fundamental assumptions of the existing model.

Also, we have to do something about the issue of regulatory capture. The Fed knew that hundreds of banks were insolvent as far back as September [0], yet they did nothing to protect depositors. Why not and why should we trust the Fed going forward given their terrible terrible track record?

The Fed gave us a decade of zero interest rates. The Fed told us there would be no inflation, then they told us inflation was transitory. As far as I am concerned the Federal Reserve is nothing more than a centralized public relations arm of the banking industry.

[0] https://mobile.twitter.com/balajis/status/163733241114198835...

Edit: Added a source

As far as I know, the Canadian system has operated on Zero reserve for a long time now. What's different between the two systems?

The Canadian Banking system is an oligarchy akin to a model where the US only had only too big to fail banks. In Canada all the big 6 banks are too big to fail and they hold disproportionate power over the government.

As an example, during the great financial crisis the Canadian taxpayer bailed out the Canadian banks to the tune of hundreds of billions of dollars, only this was done in secret.[0] The Canadian government blatantly lied to their citizens and pretended there was no bailout. To this day most Canadians are unaware the Canadian banks were bailed out at all

[0] https://macleans.ca/economy/business/the-real-canadian-bank-...

> In Canada all the big 6 banks are too big to fail and they hold disproportionate power over the government.

A recent description of Canada that I thought is apt is "three mining companies standing on top of each other wearing a trenchcoat".

It’s the same for every industry here.

Swap mining with telecom, grocery, or alcohol and the description still stands.

How many times do I have to come on here to point out this nonsense?

People read “reserve requirements have gone to zero” (which is true) and assume it is so that banks can keep lower reserves. In fact, reserve requirements became meaningless because banks had (and continue to have) so much more in reserves than they were ever required to have under the prior system.

The point wasn’t that reserve requirements were “lowered”; they were removed - because the Fed moved to a different mechanism to set short-term interest rates. If banks choose to keep lots of reserves (because you’re paying interest on them), it’s hard to change the willingness of banks to lend by changing the reserve requirement, right?

In economic terms, the supply of reserves is meeting the demand curve for reserves in an inelastic region.

So the Fed decided to announce a new approach; the so-called “ample reserves regime” where short term interest rate control would be achieved by administered rates rather than by the reserve requirements of the “limited reserves regime” that went before.

Honestly, "but reserve requirements went to zero!" has become a dog-whistle of some kind. There are many things to pay attention to in the behavior of the Fed, but this isn't one of them.

I don’t understand how the so-called “ample reserves regime” works but I would argue, given current circumstances, that it does not provide for ample reserves.

Could you explain how this new regime works and why it is safer for depositors?

From my read it appears that under the current regime banks can use 100% of depositor funds for leveraged speculation.

How is that safer than reserving at least a portion of depositor funds to support demand withdrawals?

I don’t understand the dog-whistle comment - seems dismissive without evidence. You claim that the move to zero reserves isn’t worth paying attention to but failed to explain how the new regime works or how it is safer for depositors. Clearly it isn’t.

>I don’t understand how the so-called “ample reserves regime” works but I would argue, given current circumstances, that it does not provide for ample reserves.

The ample reserves regime is "banks keep a lot of reserves because the Fed starting paying them interest on them, rather than keeping as little as possible because it was more profitable to lend interbank".

It is factually the case that it provides for ample reserves. I invite you to look at this time series: https://fred.stlouisfed.org/series/TOTRESNS

>From my read it appears that under the current regime banks can use 100% of depositor funds for leveraged speculation.

... no; because capital adequacy measurements (see the Basel Accords) are a thing, and control risk-taking much more than reserve ratios, which were more of a monetary policy control for short-term rates.

>I don’t understand the dog-whistle comment - seems dismissive without evidence. You claim that the move to zero reserves isn’t worth paying attention to but failed to explain how the new regime works or how it is safer for depositors.

People who are more-or-less clueless about the subject matter latch onto it, and draw inappropriate conclusions from it. If you want to claim that the Fed having zero reserve requirements is encouraging risk-taking from banks, you probably ought to have a theory of "why". It is nonetheless a popular soundbite from the "banks are out of control and the fox is guarding the hen-house" crowd.

The perspective that the Fed's reserve ratios are there to protect depositors is decades out-of-date and (to analogize with subject matter more familiar to most posters here) is about at the level of confusing Java with JavaScript.

I understand it’s frustrating to be “the bad guy” in these threads, but thank you for putting in the effort to educate.

If the Ample Reserve Regime worked as intended, then why did SVB (and apparently close to 400 other banks) choose to buy US Treasuries instead of keeping these funds at the Fed?

Clearly the Ample Reserve Regime didn't help in this case since these banks have taken 100% of user deposits and used them for speculation (likely leveraged).

I'll admit that I am not an expert on banking regulations. However since the 2008 Great Financial Crisis revealed the enormous amount of fraud perpetrated by the banks, I've grown skeptical of the Fractional Reserve Banking system and the Federal Reserve and have done my best to educate myself on the topic.

I don't need a theory of why banking with zero reserves is risky for depositors. I can simply point to the evidence of the recent bank failures under the Ample Reserves Regime where the banks clearly did not have ample reserves.

I don't think your condescending tone is warranted, especially given the track record of the banking industry. We are all trying to learn here and could do without the snark.

They're not "banking with zero reserves"; they're just banking under a different and more complicated set of regulations on those reserves than that one simple ratio. In principle that's a better and finer-grained set of regulatory tools, though it obviously didn't work too well for the SVB.

The SVB's problem was that they were allowed to ignore the mark-to-market losses on their long-term bond-like assets when interest rates increased, because they said they were going to hold them to maturity. That let them keep gambling that their losses would reverse, instead of raising capital after they became MTM undercapitalized but before they became insolvent. I'm not an expert here, but as far as I know the reserve ratio would have accounted for those assets in the same way and had the same problem.