Home / Contact

REPORT DEAD LINKS --- we can't keep this site up-to-date without your help

This is: http://www.primeronmoney.com/reserverequirements.html

RESERVE REQUIREMENT RATIOS

1) According to U.S. law all U.S. banks must maintain a certain amount of reserves to cover its deposits. Whether or not these reserves serve any purpose is a matter of debate we can leave for another time. The fact is that these requirements are part of banking laws and they must be observed.
2) 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.
3) "Net Transaction Accounts" is basically the dollar value of all customer's deposits and accounts receivable on the bank's books. The precise definition of transaction account comes from § "202 Definitions" of the URL immediately above: it is reproduced below
4) "(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 ... "
5) The "Reserve Requirement" for a bank with no deposits is basically the cash the bank has on hand, plus the money it has on deposit at the Federal Reserve.
6) TABLE "A" -- § 204.9 Reserve Requirement Ratios (in graphic tabular form) Note the number -- § 204.9

The numbers in this table are slightly out of date -- go tto the above link for current numbers

7) 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 $1,648,000 as a reserve [$1,038,000 + $610,000 (10% of $6,100,000)].
8) That $1,648,000 is about 3.3 % of the $50 million. That means such a bank can lend about 30 times as much money as it has in "net accounts".
9) 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.
10) (no text on this line)
11) The following reserve requirement ratios are prescribed for all depository institutions, banking Edge and agreement corporations, and United States branches and agencies of foreign banks:
12) For a net "Transaction Amount" (TA), the "Reserve Requirement" (RR) is in accordance with the following text.

For a TA of $0 to $9.3 million, the RR is 0% of TA
For a TA of $9.3 to $43.9 million, the RR is 3% of TA
For a TA over $43.9 million, the RR is $1,038,000 + 10% of amount over $43.9 million

NOTE:The above material does not make it clear that the bank owners’ investment (capital) in the bank also serves as a “reserve”. In other words, when a bank opens its doors on the first day of business -- it has no deposits and no loans to customers -- therefor no “transaction accounts”. It has only its invested capital. But at that precise moment it can lend money based on its invested capital. It must be that it is a common operating practice that the banks capital is counted as a transaction account. I am assuming that preceding statement is a fact. If it is not, I would appreciate hearing from a bank operating officer who can give me the contrary details.

If the above is correct and a bank opens with say one million dollars of invested capital ( or ANY lesser amount) -- that means the bank can immediately lend $9.3 million. If this is not correct, please post contrary information with substantiating references.

13) U.S banks are evidently also bound by the Basel II Capital Accord according to a 11/01/07 news release from The Office of the U. S. Comptroller of the Currency. <<http://www.occ.gov/ftp/release/2007-123.htm>> This accord specifies a capital/asset ratio (see << http://wfhummel.net/capitalrequirements.html >>) for a discusion. We believe the description at that link is accurate. But beware -- it is very difficult to understand.
14) According to our reading of the description at the above link, it turns out that, in general, the Basel Accord requires an amount equal to 8% of all loans as reserves.
15) Why the United States is obliged to follow an International accord as well as its own law on the subject of reserves is hard to understand.
16) At <<http://en.wikipedia.org/wiki/Reserve_ratio>> you will find that Australia, Canada, Mexico, New Zealand, Sweden and United Kingdom each have a no reserve requirement. In this writer's opinon, reserve requirements are an out-dated artifact carried over from the days when people thought money was backed by gold and silver. In all modern banking system, money is created when a bank makes a loan. It seems foolish to prohibit a bank from making a loan when it has a borrower with good collateral and a sensible plan to use the borrowed money to create wealth. See money creation. The downside leverage in the fractional reserve system is all that is needed to keep the banks prudent as long as banks are prohibited from selling their loans to third parties.
17) The following is from the Wikipedia link -- referenced above.
18) A cash reserve ratio (or CRR) is the percentage of bank reserves to deposits and notes. The cash reserve ratio is also known as the cash asset ratio or liquidity ratio. In the United States, the Board of Governors of the Federal Reserve System requires zero percent (0%) fractional reserves from depository institutions having net transactions accounts of up to $9.3 million.[1] Depository institutions having over $9.3 million, and up to $43.9 million in net transaction accounts must have fractional reserves totaling three percent (3%) of that amount.[2] Finally, depository institutions having over $43.9 million in net transaction accounts must have fractional reserves totaling ten percent (10%) of that amount.[3] However, under current policy, these numbers do not apply to time deposits from domestic corporations, or deposits from foreign corporations or governments, called "nonpersonal time deposits" and "eurocurrency liabilities," respectively. For these account classes, the fractional reserve requirement is zero percent (0%) regardless of net account value.[4]
19) The Bank of England holds to a voluntary reserve ratio system. In 1998 the average cash reserve ratio across the entire United Kingdom banking system was 3.1%. Other countries have required reserve ratios (or RRRs) that are statutorily enforced (sourced from Lecture 8, Slide 4: Central Banking and the Money Supply, by Dr. Pinar Yesin, University of Zurich (based on 2003 survey of CBC participants at the Study Center Gerzensee[5]):

Country ↓ Required reserve ratio/% ↓ Note ↓
Australia None / Canada None / Mexico None / New Zealand None / Sweden None / United Kingdom None / Eurozone 2.00 / Slovakia 2.00 / Switzerland 2.50