Are All Banks Subject to a “Run on Deposits?”

Not the 12 Federal Reserve Banks. Why?

With the exception of the 12 Federal Reserve Banks, all banks are subject to a “run on deposits” because they practice what is called “Fractional Reserve Banking.”

According to Investopidia.com,

Fractional reserve banking is a system in which only a fraction of bank deposits are required to be available for withdrawal. Banks only need to keep a specific amount of cash on hand and can create loans from the money you deposit.

…When you create an account at a bank, in the contract, you agree to allow that bank to use a percentage of your deposits as loans to other bank customers. This doesn’t mean you don’t have access to the money you deposited; it only means that if you want to remove more than the percentage a bank keeps on hand, such as the entire balance, from the account, the bank will need to access funds from somewhere else to give you your balance.

You receive interest as an incentive for keeping money in an account the bank can use to create loans.

…Fractional reserve banking supposedly has its roots in an era when gold and silver were traded. Goldsmiths would issue promissory notes, which were later used as a means of exchange. The smiths used the deposited gold to issue loans with interest, and fractional banking was born.

I am sure that the “Court Factor” who came up with that brilliant stroke of deception was handsomely rewarded by his peers. I take your money on deposit, pay you an interest rate that is lower than the rate I will charge my borrower(s), and as long as you don’t want or need your money immediately back, I can lend it to many others, and earn money on your deposited money that you have trusted me to hold on your behalf, at your request.

To answer the second question, one needs to know that the Federal Reserve Banking System is a group of 12 privately owned Regional Banks that determine the supply of money, and the cost of money (interest rate). The Fed is the Central Bank of the United States of America, and therefore, the world (or at least it used to be).

…The National Bank Act, passed in 1863, imposed 25% reserve requirements for U.S. banks under its charge, and required banks to keep reserves on hand to protect depositor funds from being used in risky investments. In 1913 the Federal Reserve Act created the system of Federal Reserve banks that we know collectively as the Federal Reserve System. Banks were then required to keep reserve balances with the Federal Reserve Banks.

Reserve Requirements for banks under the Federal Reserve Act were set at 13%, 10%, and 7% (depending on the type of bank) in 1917. In the 1950s and ’60s, the Fed had set the reserve ratio as high as 17.5% for certain banks, and it remained between 8% to 10% throughout much of the 1970s through the 2010s.

During the pandemic of 2020, the Federal Reserve reduced the reserve requirements to 0%. On March 26, 2020, the 10% and 3% required reserve ratios against net transaction deposits were reduced to 0% for all banks, essentially removing the reserve requirements altogether.

Consumer panic can cause mass withdrawals and lack of capital. When consumers, investors, and businesses panic about economic circumstances, they tend to run to their banks to withdraw everything they can to prevent further losses. This is called a bank run, and a fractional reserve system keeps them frow withdrawing their capital because the banks do not physically have it.

Before the introduction of the Fed in the early 20th century, the National Bank Act of 1863 imposed 25% reserve requirements for U.S. banks under its charge.

Nobody knows when fractional reserve banking originated, but it is certainly not a modern innovation. Goldsmiths during the Middle Ages were thought to issue demand receipts for gold on hand that exceeded the amount of physical gold they had under custody, knowing that on any given day, only a tiny fraction of that gold would be demanded.

…The Board of Governors of the Federal Reserve has the sole authority over changes in reserve requirements within limits specified by law. As of March 26, 2020, the reserve requirement was set at 0%. That’s when the board eliminated the reserve requirement due to the global financial crisis. This means that banks aren’t required to keep deposits at their Reserve Bank. Instead, they can use the funds to lend to their customers.

So when banks such as Silicon Valley Bank and Signature Bank make bad loans that weren’t repaid, those banks lost their depositors funds. When that happened, the banks tried to raise funds to shore up their cash on hand. Then word spread, and businesses ran to SVB and Signature demanding their deposits be returned. Since the reserve requirements had been lifted during Donald Trump’s Presidency, the banks had no cash, or reserves to satisfy their customers, and they were forced to close their doors.

As Senator Elizabeth Warren, Massachusetts (D) said,

“In 2018, I rang the alarm bell about what would happen if Congress rolled back critical Dodd-Frank protections: Banks would load up on risk to boost their profits and collapse, threatening our entire economy — and that is precisely what happened,” Warren said. “President Biden called on Congress to strengthen the rules for banks, and I’m proposing legislation to do just that by repealing the core of Trump’s bank law.” — nbcnews.com, March 13, 2022

The answer to the second question of why the 12 Federal Reserve Banks are not subject to a bank run is simple. They are the Bank, to banks; and a bank can’t run on another bank, only depositors can do that. Anytime the Fed needs money, it has the US Treasury Department print whatever amount it needs to resolve the issue.

I know it is hard to wrap your head around it, but the Federal Reserve Act of 1913 bestows the Fed the right to determine the supply of money in circulation. The Fed doesn’t use consumer deposits and fractional banking to make loans. They just have the Treasury Department fire up the printing presses, and magically, new money is created out of thin air. Please see The Web of Debt by Ellen Brown.

The 12 privately owned Federal Reserve Banks don’t take deposits from customers (they do hold the fractional reserves of all banks who are a member of the Federal Reserve System, but not for lending purposes), nor do they borrow money from anyone else. The Fed just has the Treasury Department fire up the printing presses, and for the 4 cents that they pay the U.S. Treasury for each bill ($1, $5. $10, $20, $100, $1,000 bills) that they circulate throughout the economy by lending to the bank customers who are a part of their system.

It may take a while for this to sink in, but once it does, you will understand that the privately owned Fed can’t be run on. The Fed doesn’t take deposits from banks for purposes of relending, and the Fed doesn’t borrow from anyone. They are the BANK.

You were probably warned to “neither a lender nor a borrower be.”

The Fed got half of it correct; they are not the borrower, but they are the Lender, to the entire world. A world indebted to its private bankers.

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