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20 Questions / Front cover / page 1.....................................................Page. 1
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This discussion introduces the concept of Fractional Reserve Banking
which is closely related to Q1 -- the creation of money out of thin air.
The discussion below is also an answer to QUESTION #15 OF 20
What is Fractional Reserve Banking all about? Are the
reserves really needed for anything? -- Would it be
better if banks could lend any amount, regardless of
whatever money they have in so-called reserves? ...
DISCUSSION
1. The chart below seems to suggest that the biggest banks must maintain a reserve of something approaching 10% -- but I believe that is a sham. Since all loans create their own reserves, there is no practical limit to how much a bank can lend -- if it can find responsible borrowers. And why should it be otherwise?
2. It is quite important to realize that the “reserve” never really comes into play. The reserve requirement ratio could be any amount -- including zero. The reserve requirement (RR) is actually zero in the United States for banks with Transactional Accounts (TA) up to about $10 million
3. See http://www.primeronmoney.com/reserverequirements.html -- where you will find the following and a link to the actual law; (these numbers are slightly out of date -- they have increased a little)
| Reserve requirements set by law from: http://www.primeronmoney.com/reserverequirements.html | |
|---|---|
| Transaction Accounts (TA) | Reserve Requirement |
| $0 to $9.3 million | 0% of TA |
| $9.3 to $43.9 million | 3% of TA |
| over $43.9 million | $1,038,000 + 10% of TA amount over $43.9 million |
4. When a bank makes a loan to a customer, it immediately records that loan as an asset ( a transaction account) on the bank’s books.
5. That “asset” immediately increases the amount of “reserves” on the banks books.