Topic: Fractional reserve banking - page 2. (Read 2438 times)

it's like overbooking airlines

Have you ever tried telling someone "Hey your bank doesn't have all your money"? If not give it a shot. You will find the FRB system has installed some kind of firewall closing all logical ports resulting in most people thinking you're full of it or that you're trying to con them somehow.

But indeed throughout history all debasement experiments have ended in "failure" from the end user perspective, conversely viewed through the eyes of the schemes originator they have been very succesful (except for the ones that got beheaded).

Well you are right, that people won't understand the intricacies, but I believe they will very well understand when somebody tell them, "Hey your bank doesn't have all your money". They will take them out ASAP, thus all finance business will avoid using FRB to avoid being vulnerable to bank run.

I think in history there was never FRB sustained without government intervention.

Yes it's quite incredible that it's accepted, although I do prefer an asset backed fractional system to a fiat backed one which is a double fuku whammy.

But I think bitcoin will end up with fractional reserve layer on top simply because 95% of end users will allow it. They simply don't understand what fractional reserve is. Final end users will only know that their currency is "backed" by bitcoin and may see a nice reassuring holoram on their card or something. They will know nothing of the blockchain etc. And if you try and tell them about fractional reserve they will glaze over as soon as the first word "fraction..." passes your lips.

Yes I agree FRB is possible. But I don't agree it is a good thing. It is no because it is a fraud. And as it goes with any fraud it is possible to happen.

However my point is that because of Bitcoin nature one can not sustain such fraud in a long term, i.e. the FRB will not work. All attempts to do FRB will lead to a crash of such institution.

 Fractional reserve banking was done in the free banking era buy banks when people deposited gold in the banks for gold promissory notes. The banks found that many just left there gold in the bank and never came to pick it up so many banks where tempted to create more promissory notes then there was gold in there vaults. Are current fiat system in the states is also fractional reserve, basically if the fed quits pumping money into the system everyone defaults on their loans and the economy stalls but the more it pumps the less usd is worth(inflation). I don't see a good way fractional reserve banking could be done with bit coin or crypto currencies and this is a good thing in my opinion.

That's a good point, but there is some difference. The central banks did exist. The difference is that there were banknotes which were backed by gold. Not the gold itself circulated, but the banknotes. The central bank could print more, even without having enough gold to back it, and they did so. To counter that, the governments restricted private individuals to convert the banknotes to gold, or allowed it at fixed price below the market price, or simply confiscated gold from private people. It was de facto a fiat currency (the banknotes), just technically backed by gold, but not really a gold.

If you go further back in time, when the real gold was used in circulation, i.e. the gold coins. Even that time they could debase the coins by "shaving" them, or adding less precious metals (all just different forms of inflation), or simply by fixing price by government.

All the above is not possible with Bitcoins, again I have to say, hats off to the creator.

Fractional reserve is definitely possible as soon as bitcoin credit and mainstream-like institutions appear. It is necessarily a good thing, but without the federal reserve and FDIC, there is no socialization of risk and moral hazard.

Who would insure that a bitcoin bank would play by any rules? How does a virtual bank using a virtual currency insure that the people they loan money to would pay it back?

Sure they can after all FRB existed when gold and silver were the mediums of exchange with and without central banks, and central banks certainly couldn't make gold or silver out of thin air. The central banks just need to keep a reserve of whatever medium of exchange they use in reserve if they're using a non-fiat system. Obviously unlike gold and silver transferring and holding bitcoins is not much of a burden so it doesn't make a whole of sense, but just like there's a chance of a 99% reserve bank system failing so is the possiblity of a bitcoin FRB system.

Well, I'm happy we can agree on something!

My last thought I'd like to leave you with...

What if it were a 99% reserve rate? I have a feeling you don't think that would end in bank runs! The only point here being that if any non-100% reserve rate is possible in the long run, then it is very likely to happen, and it's probably a good thing.

This is probably only point I am going to agree with you.
Therefore picked it up, so we don't depart in bad mood. 

My stand is that in case of Bitcoin the reserve rate will be 100% in long run (and would be with every currency unless government creates central banks and bailouts insolvent institutions). Only 100% reserve would work for Bitcoin banks because nobody can create central bank for Bitcoins.

OK, even though we disagree, it was nice to have this thread.

Take care!

Eh, I've got another ~30 minutes... I'll use 'em here, I guess... Then I'm done.

"The point is if bank has only 10% of reserves and if its clients want to withdraw let's say 20%, the problem is there."

If the clients *collectively* want to withdraw 20%, then that's called a bank run. The fact is that this is an extremely rare case, especially in light of the fact that many transactions go from one account in the bank to another. Bank runs generally only occur when people fear the institution is insolvent in some way, or that their money is at risk. See the recent Cyprus debacle.

"In your scenario, point b) why would other institution buy subject which has no assets only obligations? No such c) point will happen."

This isn't what occurs under a standard bank run scenario. It's possible, but only if massive defaults occur in the assets that the bank holds. Said differently, the bank loans out money in order to run down its reserves, it doesn't just spend it and leave it. Banks work by seeking a return on those investments. If those investments themselves turn sour, then yes, it could have liabilities that it cannot cover even if all of its assets are liquidated. That would most likely cause the bank to completely collapse, resulting in scenario a).

As for scenario c), it's an unlikely scenario, but I was listing all possibilities.

"If a) happens no customer will ever trust any bitcoin bank using FRB, and if they do not announce it, the run will happen after first suspicion of FRB in such institution."

This isn't entirely true. Bank runs in any bank do tend to cause runs in others due to fear, however, if a bank holds sufficient reserves then this isn't a fatal blow to that bank. This is why the market should determine that reserve rate, and why it's so important that you can determine that using the bitcoin protocol. If the market is allowed to do this, then the interest rate will be the barometer for the market's tendency to run on banks, thus allowing banks to properly set reserve rates. If reserves drop too low, then someone looking to deposit their money in a bank will generally avoid that bank, thus rewarding another bank with higher reserves with their business.

With all of this information available, it is apparent that a market would be better able to adapt to shocks in the market than under the current dollar based system, and the price instability caused by static supply of a currency will be mitigated by adjustments made in the loanable funds market.

This is an extremely complex topic, but a very important one. I do urge you to step back for a moment and stop assuming that you have the right answer. Monetary theory is an incredibly complex topic, and you can't just attack it outright as a "common sense" issue. As I said before, there are far too many variables involved.

As for your argument, I've understood it and have already addressed that in one of my first responses to you. Since you seem not to be satisfied, I'll go one step further and leave it there.

Suppose a bitcoin bank exists and holds fractional reserves. That alone is completely possible. Suppose, now, that there is a run on that bank, and withdrawals cannot be satisfied. In this case, the reserves are depleted. In this case, the bank has lost all credibility, and either a) all borrowers from the institution are forgiven of their debts and the depositors lose their deposits, b) another institution buys up the bank's ledger and funds the repayment of depositors to pick up the loan obligations of any depositors to the institution, or c) the bank continues functioning and directs all payments of debts straight to fulfill withdrawal requests of depositors until solvency is reached.

In this case, the single bank is affected, not FRB as a whole. In this case, it was the single bank that miscalculated the risk (or properly calculated, but lost their bet on solvency, so to speak.) This neither requires a central institution to bail the bank out, nor does it act as a reflection on FRB as a whole.

At this point, there's really no further that this discussion can go. As it stands, you haven't accepted any arguments against your position despite any validity they hold, and there's really nothing else to say on the subject. It's up to you, and others reading the thread, to make the choice to accept the more reasonable position despite any personal attachments to a previously held opinion. I hope that I have given sufficient reason to believe that my position is the superior one, and I believe that I have done so.>

In your scenario, point b) why would other institution buy subject which has no assets only obligations? No such c) point will happen.

If a) happens no customer will ever trust any bitcoin bank using FRB, and if they do not announce it, the run will happen after first suspicion of FRB in such institution.

I think the one who doesn't understand FRB is you.
You don't seem to understand that in fiat money world the FRB is sustained solely only because of central bank ability to print new money out of nothing. Without that FRB collapses, entirely.

Have a nice day too!

It is not important if one person made all the deposits, or 1000 of persons. The point is if bank has only 10% of reserves and if its clients want to withdraw let's say 20%, the problem is there.

"What are you talking about? Since the FRB bank used 90% of my money, they have only 10% of my money available. Where they'd take the other money from if I want to withdraw all my money?"

You're not the only one with money in the bank. If there are deposits on account worth $10,000,000 and you have an account worth $1,000, then with a 10% reserve the bank still has $1,000,000 they can use to fund withdrawals.

As I said before, you really don't understand how FRB works. It's fine, but you should learn how it works before feeling as if you have a sound conclusion on the subject.

As for your argument, I've understood it and have already addressed that in one of my first responses to you. Since you seem not to be satisfied, I'll go one step further and leave it there.

Suppose a bitcoin bank exists and holds fractional reserves. That alone is completely possible. Suppose, now, that there is a run on that bank, and withdrawals cannot be satisfied. In this case, the reserves are depleted. In this case, the bank has lost all credibility, and either a) all borrowers from the institution are forgiven of their debts and the depositors lose their deposits, b) another institution buys up the bank's ledger and funds the repayment of depositors to pick up the loan obligations of any [edit: borrowers from] the institution, or c) the bank continues functioning and directs all payments of debts straight to fulfill withdrawal requests of depositors until solvency is reached.

In this case, the single bank is affected, not FRB as a whole. In this case, it was the single bank that miscalculated the risk (or properly calculated, but lost their bet on solvency, so to speak.) This neither requires a central institution to bail the bank out, nor does it act as a reflection on FRB as a whole.

At this point, there's really no further that this discussion can go. As it stands, you haven't accepted any arguments against your position despite any validity they hold, and there's really nothing else to say on the subject. It's up to you, and others reading the thread, to make the choice to accept the more reasonable position despite any personal attachments to a previously held opinion. I hope that I have given sufficient reason to believe that my position is the superior one, and I believe that I have done so.

Good day, Peterz.

Just spit-balling here...   Banks could cooperate. Let's say there's a run on one bad bank and its reserve drops to zero. Instead of reaching out to central bank to print more money, the bad bank could reach out to other banks to secure a series of small loans to pay everyone back. The failing bank would need a way to pay it's loans back...so I'm at a loss there.  Also, it does become circular at some point, but given a large enough network of banks, one or two failing banks won't bring down the whole financial system. 

What if a bank in this sense wasn't thought of as a safe haven, but as a loan co-op?  Everyone shares fully in loan decisions, profit, and risk.  If a loan goes bad, well, that money disappears.  Runs would still have to be mitigated somehow.