Pksimon2007
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- May 2, 2015
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- #21
- No. It's explained above.
There is no exchange between any bank and the Fed, between bank deposits and central bank deposits.
No. It's explained above.
Yeah, I'm still chuckling.
There is no exchange between any bank and the Fed, between bank deposits and central bank deposits
New bank opens with $10 Million in deposits.
How does their reserve balance get to the Fed?
- How did they get $10 million in deposits?
- They have no reserve requirement at $10 million. They are in the zero tranche.
But let's assume they had to meet the 10% requirement of the top tranche, and they suddenly received $10M in deposits on opening day.
If $1M of those deposits were checks, they would receive $1M in reserves, which would cover their reserve requirement on $10M in deposits.
I also indicated that banks can buy and sell stuff to the Fed, primarily Treasuries.
So in the extremely unlikely event that every deposit on Day 1 was in cash, the bank would buy Treasuries from a dealer and offer to buy reserves from the Fed.
How did they get $10 million in deposits?
These strange interest seeking creatures sometimes just drop them off.
They're called depositors. Sometimes they call them customers.
They have no reserve requirement at $10 million. They are in the zero tranche.
My mistake, it was $100 million in deposits.
But let's assume they had to meet the 10% requirement of the top tranche, and they suddenly received $10M in deposits on opening day.
If $1M of those deposits were checks, they would receive $1M in reserves, which would cover their reserve requirement on $10M in deposits.
Receive reserves? What does that mean? Who gives them these reserves?
- It doesn't sound like you read my posts.
There's a lot of information there, presented simply.
It's not ideogical argument, it's an explanation of what reserves are, what reserves do, and where they come from.
If you have the intuition that they are anything like the common sense definition of reserves would lead you to think, then you're not familiar with the system.
Reserves serve no reserve function.
They are not money that is withheld from deposits, or salted away in case of emergency. They are nothing like that.
They are a completely different sort of electronic currency from anything we use, which only serve the purpose of allowing banks to clear payments with each other.
If you think of those WWII movies where some admiral in Hawaii has lackeys pushing around little wooden ships on a plexiglass-covered map to keep track of where the real ships are, you have a good picture of what reserves are.
They are little wooden money ships which keep track of where the real bank deposits are in the commercial banking system.
They're nothing more than that.
The term reserve is an archaic one, which represented something completely different in commodity money systems.
In many countries, what we call reserves are now called "settlement funds", which is far less confusing. Central bank reserves are not reserves in any sense that a businessperson or accountant would recognize them to be.
They are not money that is withheld from deposits, or salted away in case of emergency.
Back to my $100 million in deposits. The Fed is now holding $10 million.
How is that different than "withheld from deposits, or salted away in case of emergency"?
- The Fed is not "holding $10M" FROM anything. The Fed gave those reserves to the bank by putting them in their reserve account. The reserves are a completely separate thing from the deposit. They are related because reserves are used to keep score when banks accept deposits and have checks clear that are drawn on their accounts.
But the two kinds of money are not exchanged. Bank deposits never become central bank reserves or vice versa.