US Bank Reserves 10% – EU Bank Reserves 1% | Armstrong Economics

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30-11-18 11:07:00,

QUESTION: What mechanism prevents banks from creating fraudulent electronic deposits of currency?

As an IT systems admin, I have the ability to add / subtract / adjust ERP systems inventory / costing outside the normal users ability. I could add widgets to the system at will, but fraud can’t be sustained very long, as the physical widgets can’t be sold, they only exist in the system. Electronic currency, however, is only a ledger entry, and since new currency units are created as loans – What prevents any bank from just changing the numbers in their systems to create more currency units at will? Can’t get my head around this.

Thanks for all you do from a little guy just trying to get by!

ANSWER: The creation of money electronically in the banking system is the degree of leverage. Reserve Requirement Ratio at the Federal Reserve was increased on January 18th, 2018. It required that all banks with more than $122.3 million on deposit maintain a reserve of 10% of deposits. Banks with $16 million to $122.3 million must reserve 3% of all deposits. They create money that is purely electronic and we do not see it. I deposit $100 and they lend it to you. Now we both have $100 on deposit and the reserve requirement will be $20 for most banks. They then lend it out a third time and there is now $300 on deposit requiring $30. They cannot create entries out of thin air. They are audited and the reserve ratio is strictly enforced in the USA. The Fed will raise and lower that reserve ratio as they see fit based upon economic conditions.

At the European Central Bank, things are substantially different. Eurozone banks are required to hold a specified amount of funds as reserves on AVERAGE in their current accounts at their national central bank in each member state which are called “minimum reserves”. Remember, each member retained its own central bank!  A bank’s minimum reserve requirement is set for six-week periods called maintenance periods. This minimum reserves level is therefore calculated on the basis of the bank’s balance sheet prior to the start of each six-week maintenance period.

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