Barely anyone is qualified to assess the quality of a bank. It's difficult even for auditors. It shouldn't be your uncle's responsibility, it should be the responsibility of regulators.
That's really nothing to do with fractional reserve and more of an assessment of the US banking system.
If something is difficult to understand, even for so-called “experts”, that is a sign of severe dysfunction. All topics can be distilled into simplistic understanding. Once you speak in academic gobble-dee-gook you are done for.
Yes, my guy, I happen to believe that people who know what they're talking about should be listened to. I suspect you won't find this controversial. The world is far too complex for anyone to be sufficiently competent in every field.
> All topics can be distilled into simplistic understanding.
Simply false.
> Once you speak in academic gobble-dee-gook you are done for.
lol.
This would be a good candidate for a Reddit-like 'flair' concept so I wouldn't waste my time responding to someone who doesn't believe in the concept of people who know what they're talking about.
Also, the executives from those banks received compensation packages and structured equity sales prior to the banks failing. They did make out like bandits, and congress was looking at options to claw it back, but nothing was ever finalized.
Retirement funds which were invested heavily in index weighted stocks took the biggest hit net worth wise.
This is nonsense. Reserve requirements were deprecated in favour of finer-grained capital and liquidity requirements [1]. They serve the same purpose, but with a broader consideration than reserve requirements’ “is it a reserve” binary test. Banks’ ability to create money is still constrained by their capital requirements. We are on a fractional reserve system.
[1] https://www.federalreserve.gov/monetarypolicy/0693lead.pdf 1993
Those asset classes are heavily collateralized. If you want to get technical, what really happens when you convert the same underlying asset to be collaterilized multiple times and aggregate it in a single security or several steps removed so no one is the wiser?
Are you referring to SLR? In America, this is a second test [1].
[1] https://www.newyorkfed.org/medialibrary/media/banking/intern...
Most of the requirements are only applied to G-Sibs, which are only classified as such if they hold over 200 or 250B in assets (off the top of my head).
If you were paying attention to what happened with FRC, that was a trial run of things to come. There's an option's mechanism to cause the market maker to create synthetic shares. In volatility spikes they have two options to recoup losses, write/sell options and receive preferential treatment for clearing in receivership, or purchase shares. The latter in the face of significant shorting in addition to gamma squeeze causes a short squeeze (Gamestop), the former causes aggregate indebtness violations forcing delisting within 30-60 days which aren't usually announced (FRC).
Market mechanics say when there are more sellers than buyers the price goes down. If you can indirectly trigger more shares than are in existence being sold, the market can be tanked at a profit with sufficiently obfuscated capital.
Anytime you have over a 100% leverage ratio, its no longer fractional. Given the complexity of collateralization and the lack of any single clearing house for collateralized debt. You have no way of proving that the underlying capital reserve won't suddenly vanish in a contagion crisis. At any time there are tens of thousands of floating contracts that influence the market capitalization/stock price.
All banks are subject to capital requirements. Large banks have extra testing; that doesn’t mean “most” capital requirements are waived for small banks.
> an option's mechanism to cause the market maker to create synthetic shares
Former options market maker. All market makers can do this, it’s called naked shorting, and it has little to nothing to do with capital requirements in general.
> you have no way of proving that the underlying capital reserve won't suddenly vanish in a contagion crisis
Capital isn’t cash in a vault. It’s risk-weighted assets minus liabilities. Public equities are heavily weighted; that disincentivises using them significantly for capital. The only proof one needs that capital won’t vanish is the Fed’s discount window.
> Anytime you have over a 100% leverage ratio, its no longer fractional
This is the definition of fractional reserve. 10% reserve requirement means 9 parts debt to 1 part reserves, a 900% debt ratio.
We'll have to disagree. The moment the framework allowed market exposure in lieu of a capital reserve (in whole or part) it became inseparably linked as it impacts the basis of the capital reserve asset potentially misclassifying the asset as reserve instead of debt.
> This is the definition of fractional reserve.
It is the definition so long as all debt and reserve are segmented correctly into debt and reserve. The moment you have obfuscation such as multiple separate levels of collateralization or leverage being misclassified as assets; this definition fails, and the only time you'd find out about it given current frameworks is in a deleveraging (after the money is suddenly gone).
You have the same exact characteristics in a ponzi scheme.
Assets minus liabilities. What alternative valuation do you want for assets other than market value? (And again, in a crisis, the Fed’s discount window.)
> it impacts the basis of the capital reserve asset potentially misclassifying the asset as reserve instead of debt
This is double-entry accounting. Your bank deposit is your asset and the bank’s debt. A central bank reserve is a commercial bank’s asset and the central bank’s debt.
> as all debt and reserve are segmented correctly into debt and reserve
Again, this isn’t even on the level of finance or economics. It’s a fundamental misunderstanding of accounting. Reserves aren’t the same as capital, and both are assets and liabilities of someone’s. This is what fractional-reserve banking is all about. You’re basically upset there isn’t gold backing the central bank’s reserves, though even then, you’d be upset about the market price of gold varying with respect to other assets.
Regarding your Assets minus liabilities that's not strictly true. Its my understanding that bond assets are considered statically valued and not at market value when they have elected to hold it to maturity, I'm sure those aren't the only asset classes with alternate valuations/reporting.
See my edit in my last post addressing double-entry accounting, and how its not relevant to the discussion since the fraud and counterparty risk I'm talking about occurs outside the boundaries of double-entry accounting.
You seem to have mistaken the context.
Issued debt is not counted as reserve, its considered leverage and a liability, as a result you cannot issue more debt to increase your reserve. The ratio of reserve to issued debt must be below or equal to the set rate.
When you count debt as reserve unintentionally you have exponential debt being issued exceeding the ratio which ultimately collapses in the form of a Ponzi as environment and conditions change. Any ponzi eventually has a deleveraging, this often occurs when clearing any company whose assets have been collateralized potentially multiple times. The payout has already been made at origination, the value of the loan asset with backed secured collateral suddenly becomes 1/X depending on the number of X times it was loaned against; in reality it always was but the bankers didn't know it. The same asset is claimed in its entirety among X number of loan originators in clearing bankruptcy/receivership.
At the individual level people who invest in a Ponzi take losses. Risk of investing.
At the primary bank level, this is a systemic risk, bailout provided by FDIC/Fed is unwound as all aggregate fraud is unwound over time as inflation for troubled assets. Creating these plausible unforeseeable situations is incentivized.
It creates perverse incentives which is why bailout has been a recurring issue at least once every decade since the 70s. Concentrated banking means so big it will certainly fail.
When that inevitably happens, everyone holding USD or working for USD pays without their consent or knowledge via inflation. That is upsetting especially when it is easily foreseeable.
I'm not upset that it isn't gold backed. I simply do not believe it is a good idea to enable foreseeable fraud that will go undetected until its too late and encourage it to keep happening.
The risk by far outweighs any potential benefit. I'm all to aware what happens when hyper-inflation occurs. Ray Dalio wrote some nice case studies on those if you haven't already reviewed ("Bridegwater/Ray Dalio - Big Debt Crises").
In my opinion, most modern finance and economics training which I've seen is absolute garbage and encourages you to look at everything in isolation, or a very narrow context without providing fundamentals or limitations of the models they encourage. I've studied them, they just aren't very useful.
How can both parties be right while being completely wrong pretty much sums up isolation in complex interconnected systems. Many of the basic assumptions that are held true fail under some pretty simple situations involving corruption, control, coercion, and deceit.
If you can find vintage books on the subject they are much better and absolute gold mines (circa 1950s-1967) in comparison.
Under Basel III, no. They’re marked to market. Under American rules, yes, because the banking rules bone-headedly referenced GAAP. This is the HTM problem and it’s real, though far from fundamental with respect to fractional reserve banking. (It’s also solved in no way by a reserve requirement.)
> When you count debt as reserve
This is why we deprecated the reserve requirement. The Fed funds market is lent and borrowed reserves. A reserve requirement just counts liquid reserves; it doesn’t care if they’re owned or borrowed. A capital requirement takes into account if it’s borrowed. You’re arguing against the solution to the problem you pose.
> same asset is claimed in its entirety among X number of loan originators in clearing bankruptcy/receivership
Again, solved by capital requirements. Assets pledged as collateral net to zero. (A balance sheet should do this, but financial institution balance sheets are unintuitive.)
> If you can find vintage books on the subject they are much better and absolute gold mines (circa 1950s-1967) in comparison
Go to the true vintage: Bagehot and others who wrote from the height of the gold standard in the 19th century. Most English literature from post-War on the topic is fringe by that point.
I will, and thank you for the suggestion. I'm always on the lookout for books/essays/authors I haven't read. I'll add it to my reading list.
It seems often the further I go back the more applicable and less byzantine discussed subjects are.
I've gotten more out of books from 50-100 years ago then college textbooks ever provided for subjects that were around back then.
Uh... what's perplexing about the fact that the government wants banks to offer loans?