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domo

Fractional Reserve My Ass

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In the good old days it used to be that banks would take your deposit, lend out 90% and keep 10% CASH is reserve. (and they had lending standards too). Now I knew banks lent MORE THAN THEY HAVE ON DEPOSIT (!!!!!) these days but I didn't realise quite how much more than when I read the daily mail today. (I didn't buy the damn thing god forbid.) For instance Northern rock had 26bn in deposits and 86bn in loans however they manage to do that these days. A conservative 90% fractional reserve system in use mere decades ago would mean a bank with 100bn in deposits could lend 90bn max.

This shows banks today have to BORROW money(in excess of what they borrow from YOU), THEY are net debtors and their finances are in worse shape than the spendthrift consumers they push this money onto. So its no suprise NR are in deep shit you should unquestionably remove all your savings from any high street bank before this crisis get one step worse and deposit them with the NSANDI. The government might not be financially prudent but it will benefit from a flight to quality and has the advantage of being able to steal to make its obligations. If interest rates on gilt start skying then would be the time to rethink.

btw the figure below could vastly understate banks financial situation, who knows what involvment they have in derivatives and other dangerous finacial iinstruments involving asset prices and debt that could explode in a real crisis.

http://www.dailymail.co.uk/pages/live/arti...d=1770&ct=5

banksexposed1409_468x329.jpg

Edited by domo

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btw the figure below could vastly understate banks financial situation

Someone posted these figures on another thread, and they looked like a load of crap to me (frankly). I wondered where they had come from. Now I see it's the Daily Mail, I am no longer surprised.

Your statement about "traditional" bank lending being at around 10% reserves is not far off the real situation today for a bank such as HSBC, whose Tier 1 capital ratio is just under 10%. According to this table from The Mail, HSBC have less money loaned out than they have deposits. You are right to suspect that this is not the whole story.

My best guess is that the numbers in those two columns are for UK retail deposits and UK residential mortgage lending. But this is the Daily Mail, so they could be anything. Whatever these numbers are, they certainly aren't meaningful. If you want to know what your bank's financial situation really is, go read its annual report. Massive accountancy fraud notwithstanding, they typically don't lie as much as The Mail.

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Sorry guys its fractional reserve is that they can lend 10 times their deposit so 1bn in cash 10bn in loans- saw in a cartoon- money is debt- very interesting

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This is funny sh*t.. People are learning out facts that have been available for them to find out at any time for the pasts 60-70 years and now they finding out they are getting in a panic.....

This could be the start of a revolution in banking methods!

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Sorry guys its fractional reserve is that they can lend 10 times their deposit so 1bn in cash 10bn in loans- saw in a cartoon- money is debt- very interesting

Not quite, they take your deposit and lend 90% of it out, but they CANT multiply it. The multiplier effect comes from CREATING the IOU.

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NO they take your £10 and lend £100-

if your way was correct, there could never be a "RUN" on the bank, because they would always have the cash to pay you back, and clearly, this is not the case

This happened lots in the past so there was a global agreement where they limited it to 90/10

Its strange- but true ----google "money is debt" for a fuller expalnation- its absolutely fascinating

Edited by Bloo Loo

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NO they take your £10 and lend £100-

if your way was correct, there could never be a "RUN" on the bank, because they would always have the cash to pay you back, and clearly, this is not the case

This happened lots in the past so there was a global agreement where they limited it to 90/10

Its strange- but true

It is indeed true and why things look a little scary to the sheeple when they suddenly realise that their money does not sit in a vault ready for them to go pick it up.

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Sorry to be a damp squib, but loans are an asset and deposits are a liability not the other way around.

Your welcome ;)

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NO they take your £10 and lend £100-

if your way was correct, there could never be a "RUN" on the bank, because they would always have the cash to pay you back, and clearly, this is not the case

This happened lots in the past so there was a global agreement where they limited it to 90/10

Its strange- but true ----google "money is debt" for a fuller expalnation- its absolutely fascinating

Your completley wrong and you have no clue at all. There is no way a bank or anyone else can lend money which doesnt exist, which os quite clearly what your suggesting. If 100 quid is deposited at a bank then where the hell would the 1000 quid magically appear from to lend out.

And how would they always have the cash to pay you back when they have already lent most of it out? This is why bank runs happen - because depositors all want there money back but what they have in reserve cant satisfy deposits, they need to call in loans which may have gone bad,

I dont mean to post with an angry tone but your post is plain wrong and stupid. Its clear you got all your knowledge from that overrated youtube video.

Edited by domo

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They create the money out of thin air- its a promise to pay you back when you bring the promise back in= its an amazing thought isnt it? the money is created when they loan it to you, and destroyed when you pay the loan off- honest- and Im not David Ike

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NO they take your £10 and lend £100-

Not that old load of rubbish again. Please consider carrying out a reality check. It will provide you with lots of concentrated goodness and you won't come across as a confused conspiracy theorist.

If you still think the quote is correct then consider that *if* they could do that then they could also lend a tenner of the newly created UKP100 to themselves and iterate the process, thus obtaining an infinite amount of money. This clearly contradicts reality.

It is a mistake to believe rubbish just because it was in a video that someone posted on google, or wherever that bit of wisdom came from.

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Your completley wrong and you have no clue at all. There is no way a bank or anyone else can lend money which doesnt exist, which os quite clearly what your suggesting. If 100 quid is deposited at a bank then where the hell would the 1000 quid magically appear from to lend out.

And how would they always have the cash to pay you back when they have already lent most of it out? This is why bank runs happen - because depositors all want there money back but what they have in reserve cant satisfy deposits, they need to call in loans which may have gone bad,

I dont mean to post with an angry tone but your post is plain wrong and stupid. Its clear you got all your knowledge from that overrated youtube video.

[edit] How a bank can lend more than it has

Reserves are a special form of money which can be held by the bank either in its vaults or on deposit at the central bank. They are generally described as a "high-powered" form of money and are needed to perform fractional reserve banking. When a bank is in possession of bank reserves this means that it is able to lend to others more in customer receipts than it has on deposit.

If we imagine a bank which has $100 in reserves, with a 20% reserve ratio the bank would be able to lend up to $400 without breaching the ratio.

http://en.wikipedia.org/wiki/Fractional-re...ore_than_it_has

Read on and come back when you have got it!

Edited by Spikey1

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This could be the start of a revolution in banking methods!

I believe this is the start of a revolution in bank runs.

The traditional bank run was predicated on one thing - the limited supply of physical money. As soon as there was a credible rumour that a bank might be in difficulty, people panicked. They wished to get their cash out as quickly as possible, because otherwise someone else would get it first. Once the bank has run out of banknotes, that's it. Finito. First come, first served. That's why it's called a run. Because people run. Fast.

Read about bank runs in an economics textbook or a historical account, and you'll find a key underlying assumption. Whether implicit or explicit, it is assumed that the general public understands the banking system. They know what banks are up to. They allow them to create deposits by operating on fractional reserves because they believe it's generally beneficial to the economy. And it is - if nothing else, it means the country can get by with fewer physical monetary tokens.

Does this assumption hold nowadays? I don't think it does.

But I don't think this is because the general public is stupid. (They may be, but that's another story.) I think it's because the very nature of what people think of as "cash" has changed. Cash is electronic now. Few people would today consider handling large quantities of physical money in most usual circumstances. We are used to spending on plastic, whether credit or debit card. We are used to moving money around between accounts at the click of a button. Our employers put money in our accounts electronically, and we spend it electronically. Money is numbers in a database. This is fact, 100% guaranteed, correct.

Of course we can still get token money out of the wall to spend if we want to. And on the flipside, shops still have to deal with people making note & coin transactions rather than direct EFT transactions. Still, this is no longer the dominant paradigm. When was the last time you (as an individual) had to take cash to the bank and pay it in? I remember seeing my parents do this as a kid, but I rarely see it any more. I also remember being mildly horrified when my father explained to me that "my" ten pound deposit would not be kept in a special box with my name on it, for me to reclaim later.

So when the people are queueing up at Northern Rock branches today, what are they thinking? They are certainly panicking, or they wouldn't be there. But they are not fighting each other to get to the front of the queue. They are not worried that the bank will literally "run out of money" in the physical sense. They are just concerned that they might lose some or all of their electronic numbers in some future financial snafu whose machinations are mostly way over their heads. They want to put their electronic numbers into someone else's database. Someone else who has not had to ask the Bank of England to help them continue to do business. That's not an irrational sheep-like exodus leading to a destructive self-fulfilling prophecy, that's common sense.

Except clearly it is becoming a destructive self-fulfilling prophecy. Because even though the people in the queues don't realise it, Northern Rock are going to run out of money if too many people ask for it back. The rules haven't changed. It's just that the game has been repackaged, and now comes with nifty multi-coloured bits of plastic and a DVD, and people don't see the underlying mechanism any more.

As for the bank's own rules for dealing with one another, though: those have certainly changed. Anything's possible in the New Monopoly. These days, mortgages on Park Lane and the Old Kent Road can be cut up into tiny pieces and shuffled together, and the banker will give you your £200 secured on it without you even having to pass Go. But the stakes are high, and now everyone has their cards close to their chest. Because "go directly to jail" remains a very real possibility.

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Your completley wrong and you have no clue at all. There is no way a bank or anyone else can lend money which doesnt exist, which os quite clearly what your suggesting. If 100 quid is deposited at a bank then where the hell would the 1000 quid magically appear from to lend out.

And how would they always have the cash to pay you back when they have already lent most of it out? This is why bank runs happen - because depositors all want there money back but what they have in reserve cant satisfy deposits, they need to call in loans which may have gone bad,

I dont mean to post with an angry tone but your post is plain wrong and stupid. Its clear you got all your knowledge from that overrated youtube video.

Okay I'll bite.

There is no majic about fractional reserve banking, it is more like legalized thieving and it is the way banks work. Don't believe me, as I am a disney character, but this article sums it up nicely:

http://www.lewrockwell.com/rothbard/frb.html

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Its strange- but true ----google "money is debt" for a fuller expalnation- its absolutely fascinating

Sorry - did not notice you mentioned that when I first replied.

That video is wrong in the part where they describe how fractional reserve banking works. They got the money multiplier wrong, and most of the rest is chosen to mislead. It does not even have the intelectual depth of a Michael Moore "documentary", and that is already setting a rather low standard.

The second half is even more confused. They say the government should just print whatever money it needs. Well, at least that works fine in Zimbabwe.

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Not that old load of rubbish again. Please consider carrying out a reality check. It will provide you with lots of concentrated goodness and you won't come across as a confused conspiracy theorist.

If you still think the quote is correct then consider that *if* they could do that then they could also lend a tenner of the newly created UKP100 to themselves and iterate the process, thus obtaining an infinite amount of money. This clearly contradicts reality.

It is a mistake to believe rubbish just because it was in a video that someone posted on google, or wherever that bit of wisdom came from.

Thats why there is now a legal FRACTIONAL RESERVE- so they dont print too much--- if the bank was the same as you and me, then your arguement stacks up, but they are not and it doesnt- money used to be tied to gold, but now its tied to Nothing- absolutely nothing

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The issue of Fractional Reserve Banking has been covered times. If you don't believe it, email the Bank of England.

The video in my sig!

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There is no way a bank or anyone else can lend money which doesnt exist

Why not? The currency is not linked to anything physical. Where do you think inflation comes from? Money is just a number in a computer.

amount += 10,000;

Job done.

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What we all call money today isn't money at all. Since August 1971, when the USA defaulted on its sovereign debt by abolishing the USD gold convertibility, what we call money is just debt.

This dishonest system is at the root of the many excesses in the past 36 years, which are now culminating in this crisis.

As it has happened many times over in human history, the masses will abruptly realize that gold and silver are real money and will demand a return to a honest monetary system.

EDIT: typo

My kids didn't know why british money was called sterling until I explained it. They thought it was backed by gold. The eldest was horrified when I told her it was backed by faith. Maybe there's hope for the next generation.

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Sorry - did not notice you mentioned that when I first replied.

That video is wrong in the part where they describe how fractional reserve banking works. They got the money multiplier wrong, and most of the rest is chosen to mislead. It does not even have the intelectual depth of a Michael Moore "documentary", and that is already setting a rather low standard.

The second half is even more confused. They say the government should just print whatever money it needs. Well, at least that works fine in Zimbabwe.

So you are saying that this WIKI entry is wrong?

http://en.wikipedia.org/wiki/Fractional-re...ore_than_it_has

Reserves are a special form of money which can be held by the bank either in its vaults or on deposit at the central bank. They are generally described as a "high-powered" form of money and are needed to perform fractional reserve banking. When a bank is in possession of bank reserves this means that it is able to lend to others more in customer receipts than it has on deposit.

If we imagine a bank which has $100 in reserves, with a 20% reserve ratio the bank would be able to lend up to $400 without breaching the ratio.

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If you still think the quote is correct then consider that *if* they could do that then they could also lend a tenner of the newly created UKP100 to themselves and iterate the process, thus obtaining an infinite amount of money. This clearly contradicts reality.

It is a mistake to believe rubbish just because it was in a video that someone posted on google, or wherever that bit of wisdom came from.

That piece of wisdom comes from every single "introduction to economics" textbook on the market. It is truth. Fractional reserve banking is the way modern currencies work. You will find few people on this forum willing to argue with you about it any more. So I would politely suggest that you go and read about it and don't get into arguments about it until you understand how modern finance operates. It is pretty much a pre-requisite to understanding macroeconomics, and we all have better things to do with our time than explain it over and over again to the financially naive.

(With all due respect, etc.)

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In July1988, the Basle Accord removed the fractional reserve system and replaced it with the "capital adequacy system". Under the capital adequacy system, banks can lend up to a set multiple of its capital. The current rules mean a bank can issue about 12.5 times its capital. Should a bank, which is already fully loaned, wish to lend some more, it can simply issue new capital. By raising £80 million in new capital a bank can lend £1 billion. Of the £80 million, only a small proportion needs to be equity. The rest can be loan stock. In other words, by issuing a certain type of loan a bank can authorise itself to issue a great deal more.

Worse, under the capital adequacy system reserves are no longer required except to the extent needed to fund the Bank of England. Reserves are now less than 1% of deposits.

In fact, no longer needing to concentrate on maintaining reserves, banks have now become so sophisticated in their operations that they now lend without concern for how much they have on deposit. If they lend more than they have on deposit they add to their deposits by borrowing overnight. Banks have to balance their books every night. Thus, the overnight market has become an essential backstop to bank liquidity and the only real limit on the banks’ ability to create new money is the availability of acceptable borrowers.

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In July1988, the Basle Accord removed the fractional reserve system and replaced it with the "capital adequacy system". Under the capital adequacy system, banks can lend up to a set multiple of its capital. The current rules mean a bank can issue about 12.5 times its capital. Should a bank, which is already fully loaned, wish to lend some more, it can simply issue new capital. By raising £80 million in new capital a bank can lend £1 billion. Of the £80 million, only a small proportion needs to be equity. The rest can be loan stock. In other words, by issuing a certain type of loan a bank can authorise itself to issue a great deal more.

Worse, under the capital adequacy system reserves are no longer required except to the extent needed to fund the Bank of England. Reserves are now less than 1% of deposits.

In fact, no longer needing to concentrate on maintaining reserves, banks have now become so sophisticated in their operations that they now lend without concern for how much they have on deposit. If they lend more than they have on deposit they add to their deposits by borrowing overnight. Banks have to balance their books every night. Thus, the overnight market has become an essential backstop to bank liquidity and the only real limit on the banks' ability to create new money is the availability of acceptable borrowers.

Terrifying=

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