Stanford finance professor Anat Admati says big U.S. banks are putting the nation's financial system at risk.
Even after the rule changes brought on by the financial crisis, banks still lend out 95% of depositors' money.
In other words: Big U.S. banks only keep 5% of deposits on hand.
Admati says "something is very wrong" with the banking industry's overuse of leverage. She's been on a relentless public crusade to get regulators to raise the reserve requirements of banks.
Otherwise, she believes it's just a matter of time before there's another financial crisis.
Ms. Admati argues that banks are taking larger risks than other kinds of companies because they use other people's money, and the results are that they keep crashing the economy. ….
[She] says large banks should be required to raise at least 30 percent of their funding in the form of equity.
New York Times, Aug. 10
As you might imagine, bank executives disagree with Ms. Admati's stance on reserve requirements. Bankers say higher reserve levels will make U.S. banks less competitive. Yet consider that before the 2007-2009 financial crisis, bankers had persuaded regulators to reduce their reserve requirements to almost non-existent levels.
Quote:In the early 1990s, the Federal Reserve Board … took a controversial step and removed banks’ reserve requirements almost entirely.
Now banks can lend out virtually all of their deposits. In fact, they can lend out more than all of their deposits, because banks’ parent companies can issue stock, bonds, commercial paper or any financial instrument and lend the proceeds to their subsidiary banks, upon which assets the banks can make new loans. …
… when banks lend money, it gets deposited in other banks, which can lend it out again. Without a reserve requirement, the multiplier effect is no longer restricted to ten times deposits; it is virtually unlimited. Every new dollar deposited can be lent over and over throughout the system: A deposit becomes a loan becomes a deposit becomes a loan, and so on.
Conquer the Crash, second edition, pp. 101-102
The July/August 2013 Elliott Wave Theorist described bank accounts as "IOUs backed by IOUs."
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