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What does it mean when American banks have no nonborrowed reserves? [View All]

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GliderGuider Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Jan-23-08 07:03 AM
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What does it mean when American banks have no nonborrowed reserves?
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Edited on Wed Jan-23-08 07:03 AM by GliderGuider
I'm not much of an economist, but I understand a bit about the fractional reserve banking system. Here's my admittedly thin and flawed understanding. Banks are required to maintain a certain level of reserves to underwrite their loan activities. The law says they need to have at least 10% of the total value of their loans available in reserves at all times. Reserves are usually bank assets of various sorts - bonds, cash in the vault etc. If the ratio if reserves drops below 10% they are required by law to bring it back up. I think they usually do this by issuing bonds. If they have no other source of funds, they can go to the Federal Reserve's Discount Window and borrow the required amount. This is why the Fed is called the "lender of last resort".

So with that in mind, take a look at the bottom of column 2 of the first table at this link: http://www.federalreserve.gov/releases/h3/Current/

Jan. 16, total reserves $41577 million, non-borrowed reserves $200 million?

WTF is going on here? Is the Fed really telling us that all the reserves of all the banks in the United States are now just loans from the Fed? That the banks have no assets left to act as reserves? And that this utterly unprecedented situation all happened in the last month? Where did the banks own held reserves go? What does this imply for the future of American banks and by extension the global banking system?

Can anyone who has a better understanding than I tell us what's going on here? Because to me this looks really, really, really bad.

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