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The Federal Reserve Board reduced banking reserve requirements to zero in March 2020. Since that time, banks in the United States have not been required to actually hold any depositor money in the bank, making a flawed system \u2014 fractional reserve banking \u2014 worse.\u00a0<\/p>\n
With Silvergate Bank, Silicon Valley Bank and Signature Bank now shuttered, many in the U.S. are wondering if regional banks pose the same risks. Zero reserve policies at the Federal Reserve only make further bank collapses more likely. <\/p>\n
Before the pandemic, banks had to hold 10% of deposits in cash. When depositors put $1,000 in the bank, the bank wasn\u2019t required to hold that $1,000. It holds $100 and loans out $900 to customers in search of a mortgage, a car, etc. Banks charge an interest rate on those loans, which is one way in which a bank makes money. So, a bank account holder gets 0.2% interest, while the bank provides loans at 4% and higher. <\/p>\n
Fractional reserve banking is what allows a bank to keep a portion of your money in the bank while lending most of it to businesses and consumers. But if every single depositor comes for their $1,000 \u2014 as happened in the case of Silicon Valley Bank (SVB) \u2014 the bank won\u2019t have the cash on hand. If the bank is at risk of shutting down, then everybody is going to be rushing to get their $1,000 out. When this happened at SVB, the California bank regulator stepped in and put the bank into receivership.<\/p>\n
Related: <\/em><\/strong>Silicon Valley Bank was the tip of a banking iceberg<\/em><\/strong><\/p>\n The Fed has sowed the seeds of the financial crisis in more ways than zero reserve banking. When the Fed funds rate increases, it affects car loans, housing, U.S. treasuries and makes small business loans more expensive. When the value of treasuries decreases, the yield of treasuries increases. Banks are affected because they have a ton of treasuries on their balance sheets, as in the case of SVB. Banks that fail to hedge their risk go bust. <\/p>\n Approximately 1,000 startups had their money at Silicon Valley Bank. If the bank failed, all of those startups could have also been wiped out. Major publicly traded companies did have money in SVB, including Roku, which held approximately $487 million \u2014 nearly a quarter of its total cash \u2014 at the bank.<\/p>\n Only 2.7% of Silicon Valley Bank deposits are less than $250,000. Therefore, 97.3% aren\u2019t Federal Deposit Insurance Corporation (FDIC) insured. The FDIC is an independent federal agency, and banks pay a premium for banking insurance of $250,000 per depositor.<\/p>\n In 2012, Congressman @RonPaul<\/a> held a hearing titled, \u201cFractional Reserve Banking and the Federal Reserve: The Economic Consequences of High-Powered Money.\u201d<\/p>\n In this clip, Paul asks Dr. Joseph Salerno about the gold standard and whether fractional reserve banking causes bank runs: pic.twitter.com\/HeCwXn9gML<\/a><\/p>\nIs SVB systemic?<\/h2>\n
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