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Banking 8: Reserve Ratios

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How reserve requirements limit how much lending a bank can do. More free lessons at: http://www.khanacademy.org/video?v=VP3nKDUw1jA
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Text Comments (43)
Sam L (1 year ago)
Don't understand your concatenation where you get 71% from what is it 71% can you please explain? THANKS love your courses
jangzter rizer (1 year ago)
5 over 7= .71 or 71%
Jules Paddio (1 year ago)
A Stone Warrent
张文韬 (1 year ago)
I have to say it would be less confusing if you could NOT displaying "gold" component here when trying to explain the concept of the reserve ratio. The part of gold treatment and how that ties to dispensing money into the economy should be a separate topic, as most banks these days are not using gold clips to calculate reserve ratio? But thanks for making this.
Malka Deutsch (1 year ago)
How can a loan be an asset? Should it not be a liability and the interest is the actual asset?
张文韬 (1 year ago)
Looking from bank's book, the loan is what the bank lends to the borrower and it is generating interest income, thus on the asset side
Soraplushie (1 year ago)
You sound like John Mayer
Ishan Kukade (2 years ago)
too many colours
Pepe Lucho (3 years ago)
Your money's in Bill's house, and Fred's house. What's my money doing in your house! POW!
HalfKaztBoy (5 years ago)
From watching your videos I have come to the conclusion that the only things of real value is food... and my back breaking work that my boss pays me in worthless paper :( I think I'm gonna start working for apples now since that has actual value.
santiago theCreator (5 years ago)
well,,, the world is fucked
Stamatis Kavvadias (6 years ago)
Ha-Ha-Ha-Ha-HA! The question here *is not* "how much they can lend w/o real backing assets?". The real question is "Why can they lend w/o real backing assets?". And the answer is because they got used to having the real assets in the "vault", and could not accept that there are real assets in the world, not represented in their "vaults"!!!! So, they mortgage in advance, all the wealth in the real world, as if its natural destination is in their "vaults"!!! That's just the tail of banker's greed!
Diego Tovar (6 years ago)
Instead of 500/700 shouldnt it be 200/400?? Since the bank doesnt have the 300 they already gave to C????
LuqmanNaq (7 years ago)
@clray123 "unless your standpoint is that there are absolutely no worthwhile projects left to be done in this big world" If businesses, gov's, individuals and banks are simultaneously encumbered with too much debt, assets depreciating and begin deleveraging then credit contracts. It begins a deflationary collapse (that's what happened in '08). What's keeping things limping along is the trillions that have been pumped into the global system but that too will fail. Also cheap oil is gone
IvanAndreevich (7 years ago)
@clray123 Fair enough. I know the difference, I misspoke.
clray123 (7 years ago)
@LuqmanNaq As for the "system collapsing", the only thing I can see is hiccups caused by banks abandoning due dilligence (in mistaken hope of externalizing risks) and pumping money into many worthless projects over the past few years (housing bubble in US, mad EU subsidies for corrupt countries). It doesn't mean that really worthwhile projects don't exist, just that the incentives for funding them have been temporarily disabled, but as we see the system is smart enough to correct such idiocy.
clray123 (7 years ago)
@LuqmanNaq The current system requires neither "exponential growth" nor does it require a "constant expansion of debt". These are confused ideas spread by Zeitgeist and co. In fact the money (debt) amount in the system can be easily shrunk in face of declines in productivity. However, unless your standpoint is that there are absolutely no worthwhile projects left to be done in this big world (commit suicide then), there is little reason to be concerned about an insufficient growth potential.
LuqmanNaq (7 years ago)
@clray123 There was only so long we could base our economic system on the constant expansion of debt before it began to collapse and we reached that point in '07-'08. To stubbornly defend a collapsing system is irrational. How is a economic/monetary system based on exponential growth in a finite world sustainable? How can you defend a system that requires the constant expansion of debt to remain solvent? A steady state economy is the only rational system. /watch?v=Q5dDQQ76zTc
clray123 (7 years ago)
@LuqmanNaq No, it's neither a pyramid scheme nor a confidence trick. As long as there are assets backing the balance sheet (as per Sal's example - the loans are presumably collateralized, so the bank could in fact pay everyone's liabilities, just not immediately). And EVERYONE who transacts with a bank realizes it and agrees to this arrangement! (except for the brainwashed conspiracy theory dummies, who are more than welcome to take their assets elsewhere)
clray123 (7 years ago)
@IvanAndreevich You confuse "insolvency" with "illiquidity". The confidence in banks is justified because most people don't need their money at the same time - if they did, they would just keep it to themselves. By putting money into a checking account you are essentially making a bet that the collapse of the banking system (including FED protection) is less likely than, for example, having your gold stolen from your home. From a statistical perspective, that's quite a reasonable bet.
IvanAndreevich (7 years ago)
Why should there be confidence in a system that is ALWAYS insolvent at any given moment in time? I don't see how having $ in the future is being solvent today.
Yash (7 years ago)
@manilaenglish Even money comes from debt dude.. think of it.. our loan is shown as an asset to someone and will be given loan... so on..
badjouras (7 years ago)
@Luigi84289 "The form of debt involved in banking accounts for a large proportion of the money in most industrialised nations (see money, broad money, and demand deposits for a discussion of this). There is therefore a relationship between inflation, deflation, the money supply, and debt." from en.wikipedia . org/Debt
badjouras (7 years ago)
@Luigi84289 Yeah, I believe it's called inflation... Salaries today are also much higher than in 1913.
badjouras (7 years ago)
@manilaenglish That has been tried a few times - it's called communism. It doesn't work, you can't force people to be completely selfless and you can't just expect them to turn that way. I don't know why you Zeitgeist fans like to call "Resource Based Economy" when the idea is not new. I guess it's just to avoid the US stigma with communism.
darkdavegmail (7 years ago)
I hate you Sal, tyoure such a phoney. Youll soon get what u deserve.
The word is getting out. :8:)
Sudeep Shroff (8 years ago)
option 1: It can lend money up to 10,000 dollars. So that total cash and lending ration comes to 10%. I think your video explains it this way. option 2: It has to keep 10% of 1000 dollars as reserve. That is 100 dollars. And it can lend 900 dollars as loan. I hope you have understood my query. I think the option two is right. Can you explain?
Sudeep Shroff (8 years ago)
Hi Sal, I like your videos and come back to them often to learn and grasp the concepts. What I am stuck at is this concept of Reserve Ratio. I have two concepts going on in my mind. Need some clarification. Say a bank 'A' has cash with it (that includes demand deposits and time deposits) of about 1000 dollars. How much lending it can do on that day (moment!). Reserve requirement is 10%. [See the rest in my 2nd comment as I am going over 500 characters]
LuqmanNaq (8 years ago)
@manilaenglish Yep... it's basically a pyramid scheme, or a confindence trick. The smoothness of the system is based on people having confidence in the bank, if they don't a do a run it come crashing down. Ditto if more money (via credit expanision) isn't continuously created to fill up the gap that exists each time a loan is created with interest attached. It's all based on a confidence, a time lag, and credit expanision. Only ivory tower intellectuals could think that it's a good idea.
Scott Bryan (8 years ago)
@manilaenglish, But all we actually want to avoid is being on the hook for the liabilities of banks, which means we need only require them to remain fully insured. This suggests to me that our banking system isn't as important to regulate carefully as our insurance industry is. They'll be far better regulators of the financial services they cover than we could ever be. We need only avoid allowing the liabilities of insurers to grow beyond their cash equivalent assets.
xXxSHOOPIExXx (8 years ago)
Gold is an illusion of wealth, it is not wealth in of itself.
Brian Mendenhall (9 years ago)
ok, true but if you have to re-explain what the man says then where does that lead? If one cant understand 10, dont try to explain 100.... i find what he stated 100% clear and shouldnt be overlooked or restated... it was precise and accurate...dont try to change his words becuase someone doesnt understand why the difference between represented value is and actual value
Brian Mendenhall (9 years ago)
its not a ten fold increase.... 2 fold is 10 x's 10= 100 3 fold is 10x10x10 10 fold is 10 x10, ten times...
Brian Mendenhall (9 years ago)
never stated it was 80% of customers. he states 80% of value being removed. he states the reserve ratio is gold over demand. not gold over customers. it doesnt matter if 1 person comes or 9000... its based on demand. which he clearly states. Im not sure why you think he means customers. in his fake situation, you see person a respresents x value which is why he states customers. but he is referring to the value behind that individual
Xui Wong (9 years ago)
In reality the growth should be 10 ->> 100 = 1000% because you start from 10 and you should arrive to 100, that meens 10fold increase :)! long live GDP growth......
blahdelablah (9 years ago)
@khanacademy You said in this vid that Federal Reserve Ratio is 10%. Going back to vid 3 of this series, you say (paraphrasing) the bank's wealth exists in the fractional reserve system as long as investments boost the economy by a sufficient amount. So as far as I can see that means the economy of a society has to grow by (100-10% =) 90% in productivity for the banking system to stay solvent in terms of real wealth. Isn't that a hugely unrealistic risk?
blahdelablah (9 years ago)
@khanacademy You said in this vid that Federal Reserve Ratio is 10%. Going back to vid 3 of this series, you say (paraphrasing) the bank's wealth exists in the fractional reserve system as long as investments boost the economy by a sufficient amount. So as far as I can see that means the economy of a society has to grow by (100-10% =) 90% in productivity for the banking system to stay solvent in terms of real wealth. Isn't that a hugely unrealistic risk?
likeriver (9 years ago)
wait... at 5:05 why does the bank have to pay back a loan? I thought they were giving them out.
draggeddownthehole (9 years ago)
Yes, and that's called deleveraging and it contracts the money supply. That's what happened and boosted the demand for the US dollar.
jackuy12345 (9 years ago)
no if u printed too much money than the gold u got then money would be useless everything will rise and the country will fall
James Bond (10 years ago)
I love those, especially bank notes of SAl Bank:D
pongman (10 years ago)
Thank you.

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