
The Board reduced reserve requirement ratios to zero percent effective March 26 - kaffeemitsahne
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
======
btown
With the caveat that I’m by no means an economist...

The table at the bottom puts this in context: reserve requirements, which have
never been reduced by more than $2 billion across the economy in any year
prior, are suddenly reduced by $200 billion - the entire regulatory program
seems to have been unwound.

Presumably this will give late banks desperately needed liquidity and ability
to lend, but it also increases systemic risk. Desperate times these are
indeed, but this is an unprecedented measure.

~~~
dnautics
It's completely insane that they describe this in linear terms. The effects of
reducing the reserve requirement is inverse-linear with respect to the ratio.
Since the money multiplier is 1/r, reducing the reserve requirement to 0 means
that any dollar has an unbounded limit as to how far it can be re-lent. That
is quite literally infinitely more unprecedented than a 100x bigger dislodging
of the "reduction in the reserve requirement".

~~~
notahacker
The reserve requirement limit is purely theoretical anyway, since the Fed is
obliged to pump more reserves into the system to maintain its interest rate
targets when commercial banks [net] lend in excess of their current reserves
anyway. The UK hasn't had a reserve requirement since 1981.

~~~
JumpCrisscross
> _UK hasn 't had a reserve requirement since 1981_

Capital requirements remain in place, for both British and American banks. (As
remain reserve requirements for most assets at American banks.)

~~~
notahacker
Agreed (I nearly mentioned it in the original post), and stricter capital
requirements now than for much of the period since 1981. (Capital requirements
don't _entirely_ restrict the capability of the commercial banking sector to
expand the money supply either, but they do require undercapitalised banks to
raise more equity funding or similar if they want to continue to expand their
loan portfolio)

------
brenden2
Yikes, this is kind of scary. This could magnify the losses dramatically as
lenders start to implode due to the cascade of defaults. If anything, they
should increase the reserve requirements to prevent instability and encourage
a flight from risky assets. Yes, this will make the stocks go down now, but it
would probably result in fewer people getting laid off and going broke in the
future.

I'd rather see highly leveraged companies go under quickly, rather than
postponing it. A small bang now is less bad than a massive explosion later.

~~~
Red_Leaves_Flyy
In other words we, as a country, would be rise to rip the bandaid off.
Instead, we're slowly tugging at the edges. This is going to be a long, and
drawn out recovery. I hope everyone followed the general consensus and has
their retirement properly adjusted to their risk tolerance. This recovery is
probably going to take years, from the time we get the economy restarted.

~~~
WillPostForFood
We are following Japan’s path to stagnation.

~~~
toomuchtodo
What other way is there? Japan and Europe is a preview, but there are few
paths available as your structural demographics change and your economy tilts
towards services instead of manufacturing.

Civilization matures, the foundational economics change, this is the result.
Past performance does not guarantee future returns [1]. We can't rip the
bandaid off because there are still too many people desperately clinging to a
model of growth and wealth that is running out of runway. The bandaid will be
ripped off for us. How many of those over 55 are likely to keep their jobs
through this economic contraction [2] [3]? 48% of those folks (55 years old
and older) in the US have _zero_ retirement savings [4], and will rely
entirely on Social Security (which will exhaust its trust fund in 2035 [5],
reducing benefits to 75%; Social Security keeps 15 million seniors out of
poverty at current entitlement levels [6], not to mention over 1 million
children). 10k people a day turn 65 in the US. This, fortunately, entitles
them to Medicare, but their consumption pattern will be reduced for the
remainder of their lives and our Medicare costs are going to skyrocket.

You need leadership, political and monetary, that will attempt bold changes to
accommodate these realities. The longer we wait, the more radical the measures
will need to be when the time for implementation is at hand. Change happens
slowly, and then all of a sudden.

[1] [https://www.visualcapitalist.com/700-year-decline-of-
interes...](https://www.visualcapitalist.com/700-year-decline-of-interest-
rates/)

[2]
[http://www.washingtonpost.com/sf/local/2017/03/30/disabled-o...](http://www.washingtonpost.com/sf/local/2017/03/30/disabled-
or-just-desperate/)

[3] [https://apps.npr.org/unfit-for-work/](https://apps.npr.org/unfit-for-
work/)

[4] [https://www.cnbc.com/2019/04/05/these-people-are-on-the-
verg...](https://www.cnbc.com/2019/04/05/these-people-are-on-the-verge-of-
retiring-and-they-have-nothing-saved.html)

[5] [https://www.cbpp.org/research/social-security/policy-
basics-...](https://www.cbpp.org/research/social-security/policy-basics-
understanding-the-social-security-trust-funds)

[6] [https://www.cbpp.org/research/social-security/social-
securit...](https://www.cbpp.org/research/social-security/social-security-
lifts-more-americans-above-poverty-than-any-other-program)

~~~
Red_Leaves_Flyy
We, the national we, need to have hard conversations about what changes must
occur to balance the needs of all with our ability to provide. This obviously
means some people will see reductions, others will see increases. The net
result is overall more equitable society. The longer we delay the more
hardship we all will have to endure. The mere fact that we have gone decades
kicking cans is evidence of a deeply broken society without foresight and
without leadership. I am not saying we do not have foresight or leaders,
merely that our government is failing to foresee and lead.

These changes should have happened decades ago. Every day we delay is another
day picking the edges of the bandaid while the wound beneath is septic.

I can suggest my ignorant idealsof potential solutions and delve into the
weeds over things but that's a waste of effort. The people have spoken, and
they are saying they would rather suffer more than consider how else the
country could function.

------
seanhunter
There's a point where: 1)traditional policy tools are ineffective because as
rates get to zero, cutting them doesn't really provide any kind of incentive
any more 2)interventions get more and more extreme and reach the point where
they actually can increase panic rather than reduce it

It's pretty clear we're well past #1 and could be at #2.

The problem that policy-makers are facing here is the real economic impact of
this crisis as unknowable but is very likely to be very large. So it's hard to
incentivise lending.

For example if you're a bank in this environment it's pretty tough to have the
courage to go out and lend to small businesses knowing the next few months are
going to be brutal for their cashflow. The fed is going to have some
difficulty convincing them to lend even in the presence of a zero reserve
requirement ratio given that those banks will look at very serious potential
writedowns on their loans in any downside scenario.

~~~
JumpCrisscross
> _we 're well past #1 and could be at #2_

No we aren't. The discount window, central banks' original and most-powerful
tool, was _only just_ accessed by big banks [1].

[1] [https://www.bloomberg.com/news/articles/2020-03-17/u-s-
banki...](https://www.bloomberg.com/news/articles/2020-03-17/u-s-banking-
giants-tap-fed-s-discount-window-to-ease-stigma)

------
safog
The Fed has been obsessed with liquidity since this crisis has hit. From a
high level, I understand why but this coupled with the repo market issues
we've been having on and off for the past six months or so, the mortgage
markets gumming up (avg 30Y mortgage rate went _up_ after the Fed cut rates),
potential strain on dollars in the currency markets (lots of demand from
foreign countries, no supply? Unsure about this one) make me think that
something else is afoot that we're missing here.

Of course it could be as they say, and there are a bunch of overlevered
businesses that need cheap capital or they'll go bust and cutting interest
rates and injecting liquidity is the only way to save them.

~~~
solotronics
"It helps to understand that the dollar has two layers:

The first layer is central bank money (reserves) and payments are ultimately
settled in reserves. Reserves can either be cash (notes) or account balances
that banks have with the Fed. This first layer money never leaves the banking
system and only banks with access to the Fed can have it.

The second layer is money that banks can create themselves out of thin air.
When they grant you a loan they create a claim against you on the left side of
their balance sheed and they create your deposits on the right side of their
balance sheet.

When you wire transfer your deposits to another bank you instruct them to
transfer reserves to the other bank, since that is what payments are settled
with. Therefore banks can create as many loans as they want and are only
limited by their ability to generate reserves.

This is where central banks come in. In order to get reserves, banks
participate in Repo auctions and can get reserves against collateral. It used
to be that collateral needed to be really good, but the quality has decreased
a lot lately so that the Fed even accepts CDOs or regular bank loans that they
just created.

Since shadow banks (which is really just a fancy word for Asset Managers,
Dealers/Brokers and SPVs or foreign banks) do not have access to the Fed, they
rely on other banks that DO have access to the Fed to lend them reserves. This
used to be the case in the unsecured LIBOR market overnight, and if there was
any doubt that a player was not solvent, simply nobody would lend to them
overnight. In order to stabilize this, the Fed was running QE in order to
channel reserves into the shadow banking system by buying assets (CDOs, bonds,
etc.). Nowdays, the secured Repo market has replaced the unsecured interbank
market by a larger extent since the need for trust is lower.

In a crisis just like today even the interbank repo market is drying out a bit
since the value of collateral in foreign markets is questioned and US banks
are protecting their reserves. Therefore the Fed is jumping in to establish
trust in market liquidity again by pumping reserves into the market and show
their lender of last resort function (today also dealer of last resort)."

[https://miltonfriedman.hoover.org/objects/58159/the-
eurodoll...](https://miltonfriedman.hoover.org/objects/58159/the-eurodollar-
market-some-first-principles)

[https://www.reddit.com/r/wallstreetbets/comments/fezfqi/the_...](https://www.reddit.com/r/wallstreetbets/comments/fezfqi/the_ultimate_collapse_of_the_modern_financial/)

------
ghouse
Unintended Consequences. Wow -- this sets up all sorts of moral hazard for
later. And unwinding this will be extraordinarily difficult.

~~~
ChrisLomont
No it won't. Reserve ratios are commonly modified, sometimes by a decent
amount. Banks have been able to move money among accounts to effectively
reduce reserve requirements nearly at will. And banks have always been able to
lend past the reserve requirement, as long as they soon (after the fact)
borrow to cover it, usually short term via the Fed overnight lending rate.

The average person has zero idea that this happens, but it's not going to
somehow be impossible (or even hard) to undo it.

~~~
nerdponx
This is a major major change though. How do we know this isn't some kind of
Klein-esque "Shock Doctrine" type of change to start undoing banking
regulation as a whole?

~~~
ChrisLomont
Because we have models that have been tested, and we have evidence from
hundred of countries for around 100 years.

Your question seems to imply that around every corner there are likely
dragons. There are not. Mankind has extensive experience with central banking
at this point, including this case and beyond.

There have effectively been zero reserve requirements for a long time. Go read
on the difference between endogenous and exogenous money creation, and the
resulting literature. Your understanding is far outdated, as the world has
moved effectively to endogenous money over the past 40 years, as can be seen
in the literature on the topic.

------
JumpCrisscross
For net transaction accounts, _i.e._ “demand deposits, automatic transfer
service (ATS) accounts, NOW accounts, share draft accounts, telephone or
preauthorized transfer accounts, ineligible bankers acceptances, and
obligations issued by affiliates maturing in seven days or less”.

This isn’t a wholesale elimination of reserve requirements.

~~~
keithwhor
So — checking accounts for businesses and consumers...?

This does not sound great. Can somebody clarify as to how this is a sensible
move at all / what the intention is?

~~~
Spooky23
They are trying to keep banks liquid to avoid a panic and closure. People are
already starting to pull cash.

This is a 9/11 like event, except the impacts are nationwide, not just in the
NY Metro area. Companies and people are just going to stop paying bills. I'd
guess you're looking at 2-4 million people out of work in the next week. The
only saving grace is that this season is a low business period for retail and
other sectors anyway, but they'll start dying in the summer.

------
mumblemumble
It would seem that the logical response to this announcement is go run the
banks right now, before March 26, and before anyone on Fox and Friends thinks
to mention to their viewers what this really means.

~~~
blunte
This would be my take on it as well. However, a pile of government printed
paper may not be worth much anyway in a worst case scenario.

~~~
mumblemumble
True. It might dilute right quick if the banks get to start printing it, too.
I suspect the Nash equilibrium may be for them to do so with reckless abandon.

One would hope that the Fed wouldn't actually allow that to happen. But how
does one re-impose reserve requirements without causing even more problems?

It's like in that one song: "And I don't know why she swallowed the fly.
Perhaps she'll die."

On the upside, I suppose we'll now get to have an empirical test to settle
that age old debate over whether the number of people allowed to print money
should be one or many. Pity Bitcoin's in such a shambles, so we can't with
clean conscience make it a test among zero, one and many.

~~~
gowld
Banks don't print money. They give out depositors' money to borrowers. If
those depositors all demand their money back, then the FDIC covers it, so the
borrowers owe the governemnt (taxpayers) money. If they pay back, crisis
averted. If they don't, then it's a wealth transfer from taxpayers to the
people who borrowed the money and spent it on consmption or waste.

------
liminal
I'm not an economist, but it seems like the problem is a destruction of
demand, so how does increasing supply help things?

~~~
JumpCrisscross
> _how does increasing supply help things?_

 _Money_ supply.

If you're a company who invested in a great workforce, and is getting nuked
due to demand destruction, borrowing to keep paying them is a savvy long-term
bet.

If you can't borrow, you'll have to let them go. That not only creates human
misery. It also destroys the human capital you carefully built.

------
yanilkr
With most of currency being digital, this change of reserve ratio requirements
has almost no effect in the way banking and economy works. Added a Wikipedia
reference which has more references to empirical studies.

“ Many economists and bankers now realize that the amount of money in
circulation is limited only by the demand for loans, not by reserve
requirements.”

[https://en.wikipedia.org/wiki/Money_creation#Credit_theory_o...](https://en.wikipedia.org/wiki/Money_creation#Credit_theory_of_money)

------
apalmer
it will be absolutely great for the economy, rocket fuel, for about 5 years.
Eventually will lead to some insane fundamental that will require a bail out.

~~~
taurath
5 years hmm, how politically convenient

------
cabaalis
I am no economist. What is being solved here? Allowing loans? Who will take
out loans in the economy as it is?

I'd think a reserve at the banks is a good protection of solvency, and should
be increased instead of decreased. Is my layman interpretation completely
wrong? It feels like they ran out of bullets and have thrown the gun.

~~~
mech1234
Typically, For every dollar a bank "keeps" in your bank account, they are
allowed to loan out some fraction of the dollar. Let's say that this is
usually 90 cents. The amount of cash your bank actually has on-hand is 10
cents. This process is known as fractional reserve banking. Now, with 0
reserve requirement, the bank can lend out the whole dollar.

Fractional reserve banking has produced a tremendous amount of wealth for the
world over recent centuries. It encourages assets to be used in a productive
manner rather than hoarded, which is essentially wasteful.

Typically, the loans get paid off to the bank over time, and the bank
originates new loans to continue to make a profit. Currently, there are two
systemic risks:

1\. If borrowers begin to default, the bank still must cover its expenses.
Under stressful circumstances, they would normally not be allowed to draw down
their reserve to meet their expenses. This change allows this. Once the
economy recovers, the reserve requirements will be reimposed.

2\. It encourages banks to continue issuing new credit to borrowers. This
keeps economic activity flowing and prevents a situation where borrowers have
nowhere to turn to find money to keep their business afloat until profitable
times return.

~~~
Loughla
All of this looks good, except one statement that I'm willing to bet is false:

>Once the economy recovers, the reserve requirements will be reimposed.

I bet they aren't, until something awful happens, again.

~~~
mech1234
Reserve requirements are typically made more stringent while the economy is
doing well. The history of these changes by the Fed is available at the link
below.

[https://www.federalreserve.gov/monetarypolicy/reservereq.htm...](https://www.federalreserve.gov/monetarypolicy/reservereq.htm#table3)

------
taurath
Doesn't this eliminate the protections from 2008? Will this cause a run on the
banks?

~~~
JumpCrisscross
> _Doesn 't this eliminate the protections from 2008?_

No, it doesn't. Broader capital requirements are still in place. This move
just removes reserve requirements for certain categories of transaction
accounts.

~~~
taurath
Thanks for this. Of course it stands to reason that this is a defacto
reduction in capital requirements no, if reserve requirements are lowered?

~~~
JumpCrisscross
> _this is a defacto reduction in capital requirements no, if reserve
> requirements are lowered?_

Nope, though that's a reasonable assumption.

Reserve requirements regulate the fraction of deposits banks must hold at the
central bank. Reserve requirements focus on liquidity.

Capital requirements regulate the fraction of assets banks must hold as equity
(or other tiers of risk-absorbing capital). Capital reserves aren't held in a
vault, and are more of an accounting fiction than reserves. Capital
requirements focus on _solvency_.

Put another way, if half a bank's mortgages turn out to be shit, its total
reserves won't change. It's total capital will.

So reducing reserve requirements _could_ reduce banks' capital, if the freed
reserves are dumped into risk assets. Or it could leave them virtually
unchanged, if the freed reserves are dumped into safer assets. Systemically,
if the freed reserves support a continuation of orderly payment systems, they
could _increase_ banks' capital by defending the value of their assets. (Bank
balance sheets have a confusing circularity about them.)

------
ilaksh
I am worried this could be a precursor to a bank run and possible wide-scale
insolvency of banks.

I assume that someone will explain why I am an idiot and have no reason to
worry.

------
nradov
Probably a good step but it won't have much effect. Lending today is primarily
limited by lack of credit-worthy borrowers, not by reserve requirements.

------
bo1024
I don’t know much about finance and I find this a bit terrifying. Are they
hoping banks will buy lots of stocks or what is the rationale?

------
learn4ever
Anyone know the current percentage of total U.S. deposits that are "insured"
by the fdic?

------
rwol
Should we be moving money from the banks into another value store? Gold?
Investments?

~~~
ProAm
That needed to be done in January to be on the upside of this

~~~
rwol
I don't mean as an investment per se, just as a more reliable store of money.

~~~
ProAm
Just like anything else, diversify to reduce variance. But global catastrophes
are hard to 1) see in advance and 2) do anything about because you're still
buy trying to live your normal life without day to day concerns about
solvency.

------
robodale
SO, we've summoned the monster that almost destroyed us all in 2008.

------
Der_Einzige
I didn't expect to actually need those FDIC protections to guarantee that I'd
be able to withdrw money but here we are...

------
devbofh
ELI5?

~~~
ahelwer
Say you have a bank account with $100 in it. At 100% reserve requirements, the
bank must have that $100 actually in its possession at all times. This is very
safe, because you are guaranteed to be able to withdraw your money in the
event of a bank run. However, an economist might believe this is suboptimal
because the $100 is just sitting there doing nothing rather than "circulating
in the economy". Thus the concept of the reserve ratio is born: banks don't
keep that $100 around, but instead lend a percentage of it out or do whatever
weird trades they want to do to make money. This is called fractional-reserve
banking.

Before this change, reserve requirements in the US were at 10% which means the
bank could lend out $90. Now in general this is problematic because if
everyone were to try to withdraw their money at once, the bank could not
produce it. Thus we have the FDIC, which is a government program that insures
bank account deposits up to $250k so people don't lose all their money if a
bank run happens. A cynical way of looking at this is that taxpayers are on
the hook for the bank's bad behavior if they go bust, and the lower the
reserve ratio the more likely the bank is to overdo it.

Things also get really weird when other banks are in the picture. If you
deposit $100 at bank A which has 10% reserve ratio, it will lend out $90 - so
total money in the system is now $190. That $90 might end up deposited at bank
B, which also has a 10% reserve ratio, so it lends out $81 making the total
amount of money in the system $190 + $81 = $271. This process continues until
it approaches the value of principal * (1 / reserve ratio), so in our case
$100 * (1 / 0.1) = $1000 [0]. At 0% this means technically infinite money can
be lent/created, although banks will presumably keep some percentage as
reserves due to internal risk requirements (interesting assumption, I know).

Reserve requirement ratios are viewed as one of the levers the government can
use to help steer the economy. Reducing the reserve requirement ratio has the
effect of increasing the overall money supply, which has some nonlinear effect
on the economy that the government wants to happen. This move to 0%, in
addition to various other recent moves by the federal reserve, are all geared
toward flooding the economy with cheap easy money to prop it up. They will all
fail.

[0] [https://www.economicshelp.org/blog/67/money/money-
multiplier...](https://www.economicshelp.org/blog/67/money/money-multiplier-
and-reserve-ratio-in-us/)

~~~
nybble41
> However, an economist might believe this is suboptimal because the $100 is
> just sitting there doing nothing rather than "circulating in the economy".

A short-sighted economist, maybe. What needs to circulate is goods and
services, not money. If you have $100 in the bank (or stuffed in your
mattress), that means you produced stuff worth $100 more in total than what
you consumed. Those extra goods are already being put to productive use. If
your savings stay safely locked away and out of circulation that just means
prices will be a bit lower due to the decrease in the money supply, which
benefits everyone else. And when you take that saved money and spend it later
_your_ prices will be a bit lower, too, which is your reward (interest) for
basically letting everyone else borrow the _value_ of your money for the time
you had it out of circulation.

If you can take your savings and invest them in some venture likely to provide
a real return—after factoring in inflation and overhead—that would obviously
be better than just stuffing the money in your mattress. However, taking money
out of circulation is still better for the economy as a whole than "investing"
it in something that can be expected to lose value, because that would divert
goods and services away from _better_ investments. If the money supply were
held constant than you could treat price inflation or deflation as indications
that we need more or less targeted investment, respectively. Unfortunately
that isn't the case, so we're missing a key economic signal.

------
Qasaur
One day people are going to look back to today and wonder why we have
essentially given a license to print money to a privileged group of people
with close to nil accountability. First to central bankers, and now to private
bankers (which collect a profit from literally creating money out of thin air
and lending it out). Our entire fiat monetary system really is incredibly
bizarre and borderline fraudulent when you think about it in close enough
detail, and yet it is still seemingly immune from mainstream criticism.

End central banking and you've single-handedly fixed systemic wealth
inequality in the United States.

~~~
notahacker
> End central banking and you've single-handedly fixed systemic wealth
> inequality in the United States.

End central banking and San Francisco will still be full of homeless people
and rich people

~~~
Qasaur
I doubt that the VC boom would have ever reached the heights it has without
easy money policies and quantitative easing from global central banks. You
would likely still have homeless people, but you would certainly have far less
rich people.

~~~
notahacker
Sure, we would certainly have less wealth in the absence of easy money. But we
had paupers, merchants and nobility for several millennia's worth of limited
quantities of precious metals being the only money, so it stretches credulity
to pretend that hard money has any kind of egalitarian upside other than
_levelling down_.

