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Fractional Reserve Banking (frb) is completely explained on this page
Description: Fractional Reserve Banking (frb) is a banking system wherein the law says a bank must have only a small fraction of its customer's deposits on hand to satisfy the needs of those customers who want to withdraw their deposits. The material below explains that law.
Example: This shows that a bank can lend out, for instance, $50 Million if it has $1.583 Million in reserves.
THE LAW: The following reserve requirement ratios are prescribed for all banks. The numbers come from
§ 204.9 (e) of << http://www.fdic.gov/regulations/laws/rules/7500-500.html#7500204.2 >>, a federal law.
"Net Transaction Accounts" is basically the dollar value of all customer's deposits and accounts receivable (in the case of a loan) on the bank's books. The precise definition of transaction account comes from § "202 Definitions" of the URL immediately above: it is reproduced below
"(e) Transaction account means a deposit or account from which the depositor or account holder is permitted to make transfers or withdrawals by negotiable or transferable instrument, payment order of withdrawal, telephone transfer, or other similar device for the purpose of making payments or transfers to third persons or others or from which the depositor may make third party payments at an automated teller machine (“ATM”) or a remote service unit, or other electronic device, including by debit card ... "
The "Reserve Requirement" is basically the money the bank has on hand, plus the money it has on deposit at the Federal Reserve. This chart is a little outdated -- go to the link above to find the current data.
| TABLE "A" -- § 204.9 Reserve Requirement Ratios (in graphic tabular form) -- corrected here on 5/19/09 | |
|---|---|
| Net Transaction Accounts | Reserve Requirement |
| $0 to $10.3 Million | 0 percent of net accounts. |
| Over $10.3 Million and up to $44.4 Million | 3 percent of net accounts. |
| Over 44.4 Million | $1,023,000 plus 10 percent of net account amount over 44.4 million. |
| $50 Million | $1,583,000 |
In other words, if a bank has a total of $50 million of (a) customer's deposits and (b) loans to borrowers on its books, it must have $1,583,000 of its own money as a reserve. [$ 1,023,000 + $560,000 (10% of $5,600,000) = $1,583,000].
That $1,583,000 is just under 3.2% of the $50 million. That means such a bank can lend about 30 times as much money as it has in "reserves".
Note that the bank needs zero reserves if it has up to $9 million dollars in loans out to customers. In other words, if a bank has none of its own money in the bank -- it can still lend out up to $9 million.
§ 204.9 Reserve requirement ratios (in text form)
The following reserve requirement ratios are prescribed for all depository institutions ...
For a net "Transaction Amount" (TA), the "Reserve Requirement" (RR) is in accordance with the following text.
For a TA of $0 to $10.3 Million, the RR is 0% of TA
For a TA of $10.3 to $44.4 Million, the RR is 3% of TA
For a TA over $44.4 million, the RR is $1,023,000 plus 10 percent of net account amount over 44.4 million.
For a TA of $50 Million the RR is $1,583,000
NOTE A: Any individual account could have been established by either (1) a deposit by a depositor or (2) a loan to a borrower. It is assumed herewith that -- if any account has a positive balance, that means the owner of that account can take that money as he or she desires.
If the acount is a checking acount for a depositor -- the money will have been put in that account by the depositor.
If the acount is a checking account for a borrower -- the money will have been put in the account by Federal Reserve in accordance with the terms of the loan between the bank and the borrower. The Federal Reserve will have created that money -- as an agent of Congress in accordance with the Constitutional power given to Congress. The bank and the Federal Reserve do not have to put aside extra reserves for that borrowerâs account. We are putting this note here because some people think the bank lends the money to the borrower and then has to ALSO cover the dollar amount of whatever checks the borrower uses. Wright Patman essentially makes that error on pages 30 to 33 of âA Primer On Moneyâ
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