The Lemon Fool

Hi All.

I am observing a debate - I will try and keep masked my own view for the present.

Side One: Fractional Reserve Banking is a myth. The reduction of reserve ratios to zero and/or voluntary (e.g. US and UK) has more or less meant that banks can lend as much as they want, independent of deposit levels.

Side Two: Accepts much of "Side One", but argues that Basel III (and LCR & NSFR within) rules act as de-facto constraints on lending, though that isn't their primary purpose.

Are either of these arguments valid?

Regards, Newroad

Newroad wrote:Hi All.

I am observing a debate - I will try and keep masked my own view for the present.

Side One: Fractional Reserve Banking is a myth. The reduction of reserve ratios to zero and/or voluntary (e.g. US and UK) has more or less meant that banks can lend as much as they want, independent of deposit levels.

Side Two: Accepts much of "Side One", but argues that Basel III (and LCR & NSFR within) rules act as de-facto constraints on lending, though that isn't their primary purpose.

Are either of these arguments valid?

Regards, Newroad

Banks have capital constraints and as such (potential) lending isn't infinite (unless qualifying capital is - which it isn't in practice)

Newroad wrote:Hi All.

I am observing a debate - I will try and keep masked my own view for the present.

Side One: Fractional Reserve Banking is a myth. The reduction of reserve ratios to zero and/or voluntary (e.g. US and UK) has more or less meant that banks can lend as much as they want, independent of deposit levels.

Side Two: Accepts much of "Side One", but argues that Basel III (and LCR & NSFR within) rules act as de-facto constraints on lending, though that isn't their primary purpose.

Are either of these arguments valid?

Side Two more valid IMO. The cod man-on-the-street version of FRB presented in self-help youtube videos is not a useful description of how banking works. Commercial banks can lend at will but in practice they are subject both to capital requirements and to usual business constraints. There have been bailouts but they are not guaranteed -- Lehmans -- and even if a bank is bailed out shares (and some capital) are usually written down so investors are incentivised to ensure bank management lends responsibly.

BUT -- the market...

GS

Newroad wrote:Are either of these arguments valid?

Regards, Newroad

They may both be "valid", but they can't both be universally true.

For example, Basel III requires that the bank has a reserve. So can't have 0 reserve. Of course, not all "banks" are required to comply with XYZ regulation.
Some are specifically exempted.

To take a recent example.

Together with other banks, SVB had successfully lobbied Congress for weaker regulation, which allowed it (and others) to rely on held-to-maturity accounting, and to be exempted from the Basel liquidity coverage ratio (LCR) requirement.

https://cepr.org/voxeu/columns/silicon- ... -and-world

The trouble with almost all arguments, is that they rely upon each side believing that the other accepts their assumptions as facts.

Urbandreamer wrote:To take a recent example.

Together with other banks, SVB had successfully lobbied Congress for weaker regulation, which allowed it (and others) to rely on held-to-maturity accounting, and to be exempted from the Basel liquidity coverage ratio (LCR) requirement.

For completeness though I think it was only exempt from some of the regulatory constraints, in this instance, a liquidity one. It wasn't exempt from all banking supervisory regulation.

Thanks all, for the replies.

For what it's worth, perhaps little, "Side Two" was my view.

Regards, Newroad