In March 2020 the FED quietly removed the reserve requirement entirely. Does that mean our deposits are no longer federally insured anymore? Why wasn’t this a big news story?
Federal Reserve Board - Reserve Requirements.
As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.
Maybe you or a mod could add a little more description to your title.
No, that’s not what that means. You deposit is insured by FDIC. The reserve requirement has nothing to do with it.
It theoretically does make it a bit more likely that your bank goes bankrupt, causing that insurance to be invoked, but that insurance is still there.
It was out and about in the news, but there was also a pandemic ramping up, which sucked up quite a bit of air time. I’m pretty sure I remember a thread about it around the time.
But, what this basically* means is that banks can borrow any amount of money from the fed to cover loans that they make. Normally, they can only borrow a certain multiple of what they have on their balance sheets from deposits. Historically this has been between 5 and 10 times.
*I know this is simplistic. Banks borrowing from other banks and from the fed and all is a complex ballet of money transfers.
Is this unusual? Has it happened before?
And thank you !
It certainly is not a usual state of affairs. I am not aware of a time that it has ever gone to 0.
I think the fear was that people who were out of work were going to be withdrawing their money from banks to pay bills, and this could tighten up the credit market at a time when a tightening credit market would be about the worst thing that could happen to the economy.
It’s a bit dangerous, both in the ability for banks to overlend, and for there being essentially no check on monetary growth, but the alternative side, of banks running out of money to lend, could have been pretty catastrophic.
Turns out that they really didn’t need to do it, and they probably should rein that back in.
It wasn’t as if this came out of the blue, but instead as part of the central bank’s attempt at preventing utter economic collapse during the pandemic. Here, for instance, is the lede to a March 16, 2020 New York Times article (paywalled), “With the fast-spreading coronavirus posing a dire threat to economic growth, the Federal Reserve on Sunday night took the dramatic step of slashing interest rates to near-zero and unveiled a sweeping set of programs in an effort backstop the United States economy.”
How do you think this will tie in with the approaching debt ceiling date? Our government could breach the debt limit after October 2121.
"The Bipartisan Policy Center has updated its model and now projects that, absent congressional action, the debt limit “X Date”—the date when the federal government will no longer be able to meet all its obligations in full and on time will arrive in fall 2021.
Frankly, the debt ceiling is bullshit.
They are not related. The debt limit is simply a limit that congress set. Every time we approach it, it gets raised, though occasionally with a bit of grandstanding, which has resulted in govt shutdowns a couple of times.
This happens every couple of years.
One interesting upshot of this ruling is the suspension of Reg D as it applies to savings account transactions. Previously you could expect your bank to limit the number of electronic transfers or preauthorized payments from a savings account, under penalty of fees and ultimately either closure or conversion of the account to checking. With the reserve requirement no longer applying, there is less distinction between demand and time deposits.
Both of your questions are talking points often made by companies eager to get you to convert your entire life savings into gold or perhaps crypto currency. If that’s the case here, please use other sources.
No I had even thought about that. Just reading random articles and I periodically check the Federal Reserve site.
I am definitely not a banking guy, but does this mean that a small town bank in Rural County, West Virginia can borrow $10 billion from the Federal Reserve to cover those loans that they might make, possibly to corrupt local farmers knowing that these farmers won’t be able to pay them back? Surely it cannot be “any amount of money.”
Possibly, if the bank doesn’t mind going bankrupt, and possibly some of the bank officials involved going to jail, in order to give this money to these corrupt farmers.
The banks still owe this money. If these loans default and the bank goes under, then whoever buys out the bank, or ultimately the fed, will come after these corrupt farmers for the money. If it turns out that they were fraudulent in their applications, they may well go to jail as well.
Eliminating the reserve requirement doesn’t make fraud legal.
But it does mean that if legitimate farmers need a loan to get through tough times, the bank doesn’t need to turn them down based on not having enough liquidity on hand to meet the reserve requirements.