Wednesday 909

 Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 10 Money and Prices in the Long Run
Chapter 29 of 36 The Monetary System
Section 12 of 22
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The First National Bank bankers ponder their policy of 100% reserve banking.
Keeping all money depositors have deposited at their bank idle in their vaults seems unnecessary.
All the depositors will not want to withdraw all their money at one time.
Why not lend some out and earn a profit by charging interest on the loans?
Families buying houses, firms building new factories, and college students paying tuition would want to take out loans.
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First National Bank would have to keep some reserves in its vault so currency is available when depositors want to make withdrawals.
If the inflow of new deposits is about the same as the outflow of withdrawals, First National Bank would need to keep only a fraction of its deposits in reserve.
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The First National Bank bankers decide to make loans and not hold 100% of deposited money in reserve in their vault.
Thereby it adopts a system called fractional reserve banking.
The reserve ratio is the fraction of total deposits a bank holds as reserves.
If a bank has $1,000,000 in deposits and lends out $900,000 its reserve ratio is 10%.
In modern times the minimum reserve ratio is determined by the country’s central bank, in the U.S. the Fed.
This avoids the problem of banks, seeking to maximize profits, being too aggressive loaning money down to reserves near zero.
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government regulation
seifu kisei
政府規制
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What is the current, September 9, 2026, minimum reserve ratio determined by the U.S. Federal Reserve Bank? CGPT:
As of September 9, 2026, the Federal Reserve’s minimum reserve requirement is 0%.
Since March 26, 2020, the Fed has required depository institutions to hold no minimum fraction of transaction deposits as reserves under Regulation D.
That does not mean banks keep no reserves.
Banks still hold reserves for liquidity, payments, regulation, and risk management, but there is no Fed-mandated minimum reserve ratio today.
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Why was it reduced to 0% in 2020? CGPT:
The Fed reduced reserve requirements to 0% in March 2020 for two main reasons:
- first, during the COVID-19 shock it wanted banks to have maximum flexibility to keep lending to households and businesses
- second, the Fed had already shifted to an “ample reserves” system, in which banks held large reserve balances and reserve requirements were no longer important for controlling monetary policy.
The Fed therefore viewed the old 3% and 10% requirements as unnecessary and eliminated them effective March 26, 2020.
Fed-mandated minimum reserve ratios can be reenacted at any time if the Fed deems they are useful.
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Has this increased the risk of bank runs and people losing their bank deposit money? CGPT:
Eliminating the formal reserve requirement in 2020 did not mean banks were allowed to operate without liquidity (assets that can be quickly turned into cash).
Banks still hold reserves and other liquid assets, and the Fed continues to maintain an “ample reserves” system.
Bank-run risk depends more on factors such as how much uninsured money a bank has, how liquid its assets are, losses on securities or loans, and depositor confidence than on the old reserve-ratio rule itself.
For depositors, the risk of actually losing insured bank deposits remains very low because the FDIC generally protects up to $250,000 per depositor, per insured bank, per ownership category.
Deposits above that amount can be exposed if a bank fails, although recoveries may still occur through the resolution process.