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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?

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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.

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  • I guess my real question is that FDIC is set up to mitigate the risk of regional/limited bank failures. My fear is that this is a systemic change that might have such a large scale impact on so many banks that the FDIC is not well funded enough to cover it. – JohnFx Mar 19 at 21:45
  • @JohnFx I think you mean systemic. Take a deep breath. I know it's all scary. I lived through the GFC. Everyday can feel like the end. It's not. I know this is different but there is a relatively defined worst case scenario here. The change you mention is not something that will break the entire system, including the gov't. The FDIC is effectively the US Federal Government. It is the ability of the gov't to print money, issue debt, levy taxes etc. Now and in the future. The FDIC goes when Treasuries are no good and the US gov't is insolvent. That's not happening. – RWP - Down by the Bay Mar 20 at 0:54
  • Yep, my bad, systemic. Thanks! – JohnFx Mar 20 at 16:02
  • I love this part of your (RWP) answer "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." – Robert Houghton Apr 14 at 15:29

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