Quick economics question.

[benzo]

From someone who knows naught about economics. I've been reading about fractional reserve banking and reserve ratios.

According to wiki

"depository institutions having over $43.9 million in net transaction accounts must have fractional reserves totaling ten percent (10%) of that amount".

Cant the Fed/US gov dramatically cut that ratio to free up some cash?

...Or should I go and read some more before asking stupid questions?

thanks.

Edited by benzo on Tuesday 7th October 00:31

[BigLepton]

When I was a lad doing 'A' level economics, I think we called that liquidity ratio. Looking that up might help. IIRC 10% probably sounds a bit high!

[Chilli]

Liquidity ratios. Well, these are a measurement of cashflows. There are limits inmposed by the FSA that every bank and financial institution has to adhere to. They are calculated by measuring the the inflows and outflows of cash, and over a specific time period, and are measured as a % of total deposits. It is this ratio that determines if a firm can meet its obligations, and also gives management the tools required to effectively mnage liquidity......or so we thought. This is why a "run" on a bank is so damaging. If every retail (or wholesale) customer took its money out, the bank simpy couldn't cope in that timeframe and therefore would be deemed as unable to continue operations. Then you get taken over everyone panics, etc, etc,