What are the practical effects for banking consumers from Fed cutting fractional reserve requirements to zero?

Question

With all the other news, it seems like the fed eliminating the Fractional reserve requirements for banks in is not getting so much attention. Everyone is talking about the Fed Discount rate, which I think has far less direct affect on consumers, but this change worries me.

I'm curious if the effects of this on individuals who store/borrow assets with banks will be as deleterious as it seems at first blush. Does this really mean that banks can loan out 100% of their cash reserves? It would seem that this increases a risk of bank runs considerably, to a level that I am not confident that the FDIC is prepared to cover.

Should I be concerned about this change in my personal finances, and how worried should I be about this?

Answer 1

Short Answer:

• The FDIC exists specifically so that there are not MASS runs on the banks. No need to worry as long as you're under the limit(s) in your account(s).

• Make sure your account is insured: https://www.fdic.gov/deposit/deposits/faq.html

• They say that the "FDIC is backed by the full faith and credit of the US Government." And they really do mean it.

Longer Answer:

• Even if this could at the margin mean that the FDIC would need to pony up more money to make insured accounts whole in the event of a bank becoming insolvent, the whole point here is that it's not about the bank, it's about the Federal Gov't. It's about the Federal Gov't backstop of your savings account, not the riskiness of the bank.

• There may eventually (likely?) be runs on SOME banks because of the effect of the current virus-led crisis. There may even be a couple more runs down the road than there would have been otherwise because of this change. That doesn't mean there is less political will to back the FDIC. If anything, there is more resolve now.

• Yes, theoretically banks could make lots more loans. This doesn't mean that a for-profit bank is suddenly going to make a bunch of what it thinks are bad loans. I am a fan of this change because at the local level it should make it easier for a bank to extend a loan to a small business that needs it, AND is worthy of (capable of eventually repaying) such a loan to weather the crisis. I don't know how many of those loans will be made though until bankers see a light at the end of this tunnel.

• The type of behavior you mention here, and what went on during the Great Depression with runs on banks, has been studied extensively by economists. All of those lessons were reviewed during the GFC. Your money held in an FDIC-insured account under the limits laid out on their website should be money good.

• I believe that this (the FDIC backstop) is literally the last backstop that would ever be abandoned. It would ruin the country. Those in power understand this and would rather have hyper-inflation caused by massive money printing in order to make good on the FDIC's promises.

• We'd far sooner have hyper-inflation to make good on FDIC promises than a breaking of those promises. That's because those in power have studied banking crises and the Great Depression and they know that you can't have people questioning whether or not they'll get their money back from their savings accounts. The FDIC will not fail unless the entire gov't fails. They'll print their way out first. That resulting inflationary impulse would have to fight the current deflationary one from the virus. As to the magnitude of each, who knows. If you start to get worried about hyper-inflation buy some TIPs, i-bonds, commodities, etc.

• Being potentially worried about hyper-inflation in the future is not unreasonable, but that would potentially be caused by actions that are designed to counteract the current massive deflationary impulse from this virus.