Fractional-Reserve Banks are Inherently Risky

01 Apr

The expansion of $100 through fractional-reser...

The expansion of $100 through fractional-reserve banking with varying reserve requirements. Each curve approaches a limit. This limit is the value that the money multiplier calculates. (Photo credit: Wikipedia)

A few of us have foreign bank accounts.  Many of us wish we had foreign bank accounts.  No one would want the inconvenience of a distant, foreign bank account unless they didn’t trust their domestic banks or government.

In virtually every case, the primary motive for seeking a foreign bank account is our distrust in domestic banks.  Because we fear the loss of our wealth to domestic inflation, high taxes or perhaps confiscation by our own government, we seek to deposit our funds in the “safety” of foreign banks.

However, the “Cyprus Crisis” has taught us that foreign banks may be even more dangerous than domestic bank accounts. As a result, we should rethink our desire to open or maintain an account in a foreign bank.

For example, published an article entitled “Words Of Warning: Get Your Money Out Of European Banks”:

“If you still have money in European banks, you need to get it out.  This is particularly true if you have money in southern European banks.  One thing has become abundantly clear: at least some Cyprus depositors are going to lose a substantial amount of money.  Personally, I never dreamed that they would go after private bank accounts in Europe, but now that this precedent has been set it should be apparent to everyone that no bank account will ever be 100% safe ever again.

“Without trust, a banking system simply cannot function, [however] trust in the European banking system has been shattered and that people need to get their money out of those banks as rapidly as they can.”


Every financial institution that engages in fractional-reserve banking exists only insofar as it exudes an aura of trustworthiness that’s believed by its depositors.  Maintaining this trust is especially difficult for fractional-reserve banks.  I.e., if you deposit $10,000 in a fractional-reserve bank, the banker will then turn around and loan about $9,600 of your money to some complete strangers!

Given that fractional-reserve banking can require banks to keep as little as 3.3% of their deposits in the their vaults, if just 3.3% of their depositors decide to withdraw all of their funds on the same day, the bank can be rendered insolvent and even put out of business.  I.e., if just one depositor in thirty loses his trust in the bank and withdraws his funds, the bank might fail.

Under fractional-reserve banking all banks and all national banking systems are extremely fragile because they are vulnerable to collapse if just a small percentage of their depositors lose faith in the bank, panic, and start a “bank run” of withdrawals.

Arguably, the depositors’ trust is more important to a bank’s survival than the actual deposits.

Implication:  Any bank or national banking system that loses public trust may suffer a “bank run” of withdrawals that could quickly exhaust the 3.3% of deposits that it holds in “reserve”.  Once those funds disappear, the bank could be suddenly reduced to bankruptcy.

Implication:  If you’re depositing your wealth with a bank that’s lost, or is likely to soon lose, public confidence, you need to consider removing your funds.

As Mish Shedlock observed, “The first law in any panic is to be the first to panic.”  In other words, the first people to panic and pull their cash out of an untrustworthy bank are likely to get all of their money.  Those who panic later, may act too late and lose everything.

It’s odd, but every bank depositor—even the most ignorant—seems to intuitively know Shedlock’s “law of panic”.  Even though we use banks every day in ways that seem so natural, so automatic, and without cause for concern—it appears that each of us is naturally distrustful of banks. Either we know that banks are inherently fragile institutions, or we’re each so concerned about “my money” that anything that threatens my money precipitates our instant and extreme response.

When it comes to my bank and my money, I am “spring-loaded” to respond to any threat—and so are you.  We’re each primed to panic at any given moment.  It’s human nature.  We have a genetic predisposition to 1) flight; 2) fight; and 3) bank panic.

Therefore, once there’s any hint of open distrust in a bank, virtually every depositor knows it’s time to get out now.  If many withdraw their funds, a panic can ensue, and the bank can be suddenly destroyed.

Government recognizes our inherent distrust of banks and natural tendency to “panic”.  Therefore, the FDIC insures individual bank accounts up to $250,000.  Given the presence of FDIC insurance, we’re willing to trust our local banks enough to deposit our funds therein.  We trust the banks because we trust the government.  Or, at least we did trust the government until Cyprus showed us that government might not be much more trustworthy than banks.

In fact, the FDIC is just as vulnerable to bank runs on a national level as individual banks are on a local level.  If 3.3% of all Americans tried to withdraw their funds from their banks at the same time, they might not only collapse their individual banks—they might even collapse the entire national banking system.

Given the interrelated nature of all national banking systems, if one nation’s banking system collapsed, the domino-effect might collapse several other nations’ banking system.  For example, the current Cyprus Crisis was caused by the Cyprus bankers’ willingness to invest in Greek bonds.  When the Greek government and financial system failed to make good on Greek bonds, they instigated a process that eventually caused the current Cyprus Crisis.

Just as the Greek financial problem triggered today’s Cyprus Crisis, we can wonder if the current Cyprus Crisis will push yet another nation’s banking system towards bankruptcy.

The point to all of this is that foreign banks are nowhere near as safe as many of us have previously supposed.

Domestic banks may be as unsafe ad foreign banks

So.  If our confidence in foreign banks is diminished, does that mean we can safely deposit our funds in US banks?

Not necessarily.

Writing for Forbes magazine, economist Laurence Kotlikoff recently observed:

“Whatever happens, no one is going to trust or use Cypriot banks.  This will shut down the country’s financial highway and flip Cyprus’ economy to a truly awful equilibrium in a replay of our own country’s Great Depression, which was kicked off by the failure of one-in-three U.S. banks.

“Cyprus is a small country.  Still, the failure of its banks could trigger massive bank runs in Greece.  After all, if the European Central Bank is abandoning Cypriot depositors, they may abandon Greek depositors next.  A run on Greek banks could then spread to Portugal, Ireland, Spain, and Italy and from there to Belgium and France and, you get the picture, to other countries around the globe, including, drum roll, the U.S.   Every bank in each of these countries has made promises they can’t keep were push come to shove, i.e., if all depositors demand their money back immediately.”

Mr. Kotlikoff explains the potential for contagion that’s inherent in the interconnected global banking system. What we see in Cyprus today could trigger similar problems in Greece, Portugal, Ireland . . . and even the US.

But Mr. Kotlikoff underestimates the problem when he writes that such debacle will be triggered “if all depositors demand their money back immediately”.  If all of those nations’ banks are keeping only about 3% of their deposits in their vaults, a global bank collapse is conceivable if only about 3%—not “all”—of each nations’ depositors withdrew their deposits simultaneously.

•  As a practical matter, we probably wouldn’t see a national or global banking unless 10% of a nation’s depositors demanded to withdraw their funds at the same time.

But what is 10% in our brave, new internet world?

Thanks to the internet, we can all engage in “online banking” that allows us to pay our bills “online” and also move funds from our savings accounts to our checking accounts.  Very convenient.

But online banking also allows us to move our funds in one bank to another bank.  Therefore, we don’t need to drive to our bank to create a bank run of the sort seen in the movie “It’s A Wonderful Life”.  We don’t even need to visit the local ATM.  All we need to do is fire up our computers and make our money move at the speed of light from one bank to another.  This isn’t theory.  Back about A.D. 2010, a number of California banks suffered “electronic bank runs” that nearly put those banks out of business.

So, let’s suppose that a rumor appeared on the internet that the ABC Bank was about to go bankrupt.  Let’s suppose that rumor “went viral”.  Let’s suppose that 10% of the ABC Bank’s depositors were capable of online banking and saw and believed that internet rumor.  If that 10% simultaneously “panicked” and moved their funds to another bank, their original bank might be rendered insolvent in a matter of minutes.

One lesson seen in both the Cyprus Crisis and online banking is how quickly banking problems can take place.   In the Cyprus Crisis a nation’s banking system has been torched in a matter of days.  In the case of online banking, an individual bank could be destroyed in minutes.

The sheer speed at which fractional-reserve banks can be destroyed has to diminish public confidence in banking around the globe.  As a result, can we expect to see significant withdrawals from not only banks that are suspect, but from the entire banking system?  How great must those withdrawals be, before a full-fledged national, or even global, bank run ensues?

I’m not suggesting that American banks are as vulnerable to bank runs as the banks of Cyprus.  I presume that American banks have more reliable mechanisms to prevent or endure bank runs.    But, both the Cyprus and US banking systems are based on fractional-reserve banking.  So, how much real difference in vulnerability exists between the two national banking systems?  Not much.


Big deal.  24 Krugerrands were confiscated from a safety deposit box.  It’s a triviality.

But it’s also the kind of story that could go viral and, next thing you know, people around the country could be pulling their property out of their safety deposit boxes and withdrawing funds from their bank accounts.  That’s a bank run; maybe a national bank run.  Out of little rumors, giant bank runs grow.

•  If the loss of two dozen Krugerrands is a triviality, here’s another article from Canada that seems more ominous—especially if we presume that fundamental principles seen in Canadian bank law are also likely to be found in US laws. headline: “CANADA INCLUDES DEPOSITOR HAIRCUT BAIL-IN PROVISION FOR SYSTEMICALLY IMPORTANT BANKS IN 2013 BUDGET!” The article describes,

“. . .  an alarming provision that has been buried deep inside the official 2013 Canadian Budget that will result in depositor haircut bail-ins . . . during the next bank crisis.”

I.e., the Cyprus “bail-in” declared that the wealthiest bank depositors (having over 100,000 euros in a bank account) were liable to “contribute” between 20% and 40% of their funds to keep their bank afloat.   In return for their funds, depositors will receive shares in the newly re-capitalized bank.

This “Economic Action Plan 2013,” declares:

“The Government also recognizes the need to manage the risks associated with systemically important banks—those banks whose distress or failure could cause a disruption to the financial system and, in turn, negative impacts on the economy. This requires strong prudential oversight and a robust set of options for resolving these institutions without the use of taxpayer funds, in the unlikely event that one becomes non-viable.”

“Systemically important” is Canadian for “Too Big To Fail” (TBTF).

“Without the use of taxpayer funds” implies that the funds needed to keep “systemically important banks” afloat will come from a source other than taxpayers.  Gee, I wonder who that source could be?  Depositors?

Based on that new law, we can reasonably assume that the Canadian government anticipates a significant series of bank collapses.  Therefore, Canada is passing laws to legalize the robbery of bank depositors’ funds.

By excluding taxpayers from liability, if and when a crash comes, there’ll be less probability of public riots.  Instead, if the liability for supporting the banks rests only on the shoulders of the few wealthy Canadians who have more than 100,000 Canadian dollars in their accounts, there’ll be little or no organized protests.  The government and banks will, like Robin Hood, rob the rich—but like the Communists—keep it for themselves.

The new Canadian bank looting law continues:

“The Government proposes to implement a bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital.

Lessee if I can translate Canadian legalese into American English:

We know that bank “bail-outs” are based on funds coming to the bank from outside sources like the Federal Reserve or government (taxpayers). It follows that “bail-in” funds will come from sources inside the banks.

If the bank is broke, what sources remain inside the banks besides the depositors’ accounts?  Thus, the “bail-in regime” is code for the bank looting its own depositors’ accounts.

But, only the banks that are “systemically important” (TBTF) will be empowered to loot their depositors’ accounts. Banks that aren’t “systemically important” won’t be empowered to loot their depositor’s accounts.

I’m not sure how to read that.  At first, I supposed that the law implied that depositors might be better off to do business with a small bank since they couldn’t be looted by their own bank (as they could if they banked with a TBTF bank).  Cause for celebration, hmm?

Maybe not.

On further consideration, I realized that in the event of a nation banking crisis, there might be no help whatsoever from taxpayers for either the big banks or the small.  And there’d be no help from the depositors in small banks to support their floundering small bank.  Thus, depositors in small banks would probably lose everything if their bank collapsed.

However, in the event of a systemic banking collapse, those whose savings were deposited in a “systemically important” bank would probably lose only about 40% of their savings—rather than all of their savings like the saps who bank with the little banks.

So, YAY!  Let’s bank with the “systemically important” banks and lose only 40% (although that percentage could rise) of our wealth!

What we’re seeing in Cyprus, and what we may see in other countries like Canada, are plans to rob the rich and keep if for the banks and/or government.  This isn’t quite the same as the Communist mantra, “From each according to his ability; to each according to his need”—but it’s so similar that it may offer a glimpse into government’s plans for Canadians.  Perhaps they’re about to be officially “communized”.

•  The implications in all of this are:

1) Because fractional-reserve banks keep only a small “fraction” of their bank deposits in “reserve” in their bank vaults, all “fractional-reserve” banks and banking systems are inherently vulnerable to bank runs and economic adversity. (Those who live by the “fraction,” die by the “fraction”.)

2) Foreign fractional-reserve banks may be riskier than US banks.

3) If US banks are generally less risky than foreign banks, the difference in degrees of risk are only marginal.

4) Economic adversity seems likely to increase and could throw many of world’s banks and banking systems into bankruptcy.

5) If you’re preserving most of your wealth in fractional-reserve banks, there’s a strong probability that you may lose much or all of your saving in the foreseeable future.

6) It would be good idea to diversify at least some of your savings out of fractional-reserve banks and into a non-digital currency that can’t be taken by means of government or bank computers.  (“Non-digital currency” means physical gold or silver.) And,

7)  You should hide some significant portion of your wealth where only you and/or your spouse know the location.   Not a safety deposit box, but a hidey-hole on your property, on a trusted relative’s property, where government and bankers can’t find it.

Such hidden, physical savings might be just what you need to see you through a possible banking crisis


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23 responses to “Fractional-Reserve Banks are Inherently Risky

  1. mike

    April 1, 2013 at 12:41 PM

    IMHO it is not the banks that are risky, it is the currency. Fiat money has a role to play as a medium of exchange (MOE) and it can do that very well as long as we do not attempt to use it as a store of value (SOV). Fiat money is a excellent MOE…Gold is a excellent SOV.

    It is best to not mix/interchange the two. Those who use currency as a SOV always lose out when, not if, fiat money fails and those who did not are very happy that they are not supporting their own enslavement. BTW, those who use fiat money also lose even before it fails due to the the devaluation/inflation. Got gold?

    • Adask

      April 1, 2013 at 1:37 PM

      Gold is both an excellent “store of value” and an excellent “medium of exchange”–meaning that by using gold coins, you the buyer “exchanges” both the legal and equitable titles to his gold coin for the legal and equitable titles to whatever property he is buying. However, as I understand it, fiat currency is an unreliable store of value and is only an excellent “medium of “transfer”–meaning that by means of FRNs, the “buyer” (transferee) can transfer equitable title to his FRNs in return for equitable title to whatever property is being purchased from the “seller” (transferor).

      • mike

        April 1, 2013 at 6:36 PM

        Just a slight disagreement. Gold will work as a MOE, but I would never say it is excellent…too much like barter, i.e. I have an ounce of gold and I only want a bushel of apples and a dozen eggs…too much hassle. Fiat is the lube that makes the transaction smooth; however, I prefer to never ever give the bankers an advantage by using their money as a store of value.

      • Anon4fun

        April 1, 2013 at 7:48 PM

        mike: “Gold will work as a MOE, but I would never say it is excellent…too much like barter”

        This is so. The best argument for gold is its function as a store of value. In this regard, gold is top-notch.

        However, the arguments for gold as a medium of exchange are essentially arguments for a return to barter. Gold might be somewhat above average in this regard, but you’re still talking barter, which is like sand in the gears of a modern economy, among its other problems.

        For some reason (which maybe someone here can explain), many sellers of retail gold seem unsatisfied to pitch it only as a store of value, at which function gold excels.

        Instead, they also market it as a kind of macro-economic panacea, thus diluting their strong argument with a weak one (which is of little relevance to the retail buyer, besides), not to mention mixing apples and oranges: i.e. micro-economics and political economy.

  2. Christian Gains

    April 1, 2013 at 1:15 PM

    “A false balance is an abomination to the Lord, but a true balance is His delight”…(Prov.11:1) This verse ACTUALLY was originally written, (as FAR too few Christians realize), dealing with “weights and balances” — or, the ancient method for determining the value of an item, by it’s weight, using a “Balance”, or, a “Scale” to do so.

    As this verse clearly demonstrates: A just weight and balance, are the Lord’s, all the weights of the bag, are His work”, (Prov.16:11)” It’s referring to a bag of money.

    But, it is also wise counsel, in relation to decision making, and actions to be taken, or not.

    In other words, move cautiously, but, do NOT drag your feet, or procrastinate! Make a PROPERLY BALANCED determination of how much to withdraw, when, where, and what to then do with your cash.

    Remember, cash has been propagandized, as being suspicious, therefore, few LARGE purchases are allowed in cash, in MANY instances.

    AND, large cash withdrawals, (larger that $10,000), are reported to the Authorities, as possibly indicating criminal activities, — [with the “plausibly deniable” excuse that “only criminals pay with cash, because ONLY criminals want to hide their activities — not leave a ‘paper trail'”].

    While such a GENERAL “broad brush” accusation is ludicrous, at the best, it IS useful for those who dearly love to be “IN CHARGE AND CONTROL”, so, use discretion, as well as determination.

    • Jerry Sparks

      April 1, 2013 at 4:43 PM

      Christian Gains,
      I love your comments & going way back too !!! Are you familiar with this “Solar Calendar?” If so, what are your thoughts about it? Which came first, sunrise or sunset? I ask this sincerely. It’s new to me,i.e. the Solar Calendar. However, it makes more sense to me that a day begins at sunrise & ends just before the sun is rising the next day regardless of where we are on earth. Help me out here,hear? ( – : < a homemade computer smilie

    • Doug

      April 6, 2013 at 4:35 AM

      You are spot on, Christian. In my personal life – once I realized that God’s always right and I’m usually wrong my daily walk was so simplified.

      Aside from the immorality being shoved down our throats by those in “authority” that has caused America to drift into the “immoral abyss” … NOTHING contributes more to the destruction of America than the debt based, fiat, credit system run by the Federal Reserve here, and Central Banks everywhere they exist.

      I get a kick out of listening to those claiming to be “sovereigns” that continue to maintain driver licenses, SSNs, bank accounts and credit cards, etc., THEY ARE SEARCHING FOR A JAIL CELL.

      • Jerry Sparks

        April 6, 2013 at 1:01 PM

        @ > I get a kick out of listening to those claiming to be “sovereigns” that continue to maintain driver licenses, SSNs, bank accounts and credit cards, etc., THEY ARE SEARCHING FOR A JAIL CELL.

        Right !!! Like, I am Sovwren. I don’t have a driver license but “my person does.” This statement is asking for a competency hearing held by a guhmunt shrink. I’m looking for the video re: this. I will send same IF I find it. You will shake your head in disbelief. He got tasered too,but,he asked for it.

        “Dig” the following even tho it’s mixing oranges with applesauce.

        By Holy Thursday evening, Peters was saying that Pope Francis had merely “disregarded” the law — not violated it. ( that Pope Francis had merely “disregarded” the law — not violated it.
        What is good for the goose is good for the goose E ain’t it ? We don’t violate some so called laws, we just disregard them. This will be my next defense. (:

      • Jerry Sparks

        April 6, 2013 at 2:06 PM


        I don’t know if I have this link correct. I cut & pasted it. I believe you can bring it up by typing in,
        cameraman-tazed-in-court, in your search bar. You will get a lot of hearty belly laffs out of this one.
        This is one taser occasion I think/feel was justified.…/cameraman-tazed-in-court-jerk-or-justified-2369.

  3. bandit

    April 1, 2013 at 1:27 PM

    “Render unto Caesar the things which are Caesar’s, and unto God the things that are God’s”

    Is money necessary in Gods world?

    • Jerry Sparks

      April 1, 2013 at 3:05 PM

      @ >Is money necessary in Gods world?
      Hi bandit, > Isaiah 55:1, > Come, buy wine and milk without money and without price. … and eat!
      Come! Buy wine and milk without money and without price. … <(this is one of many other verses)
      My belief & understanding of this verse will be "the way it is WHEN the Kingdom (Government) of "God" is FINALLY established ON this Earth,i.e.,e.g., "Thy Kingdom come, thy will be done on this earth AS IT IS in heaven." It ain't AS IS …..yet.

      • Jerry Sparks

        April 1, 2013 at 3:10 PM

        bandit,p.s., here is another translation,
        Is anyone thirsty?
        Come and drink—
        even if you have no money!
        Come, take your choice of wine or milk—
        it’s all free!

        plainnurn all git out, right Huey Campbell ?

      • bandit

        April 2, 2013 at 2:39 AM

        “Thy Kingdom come, thy will be done on this earth AS IT IS in heaven.” It ain’t AS IS …..yet.

        Is it not scripture to live in the way of the lord now although one will be persecuted?

  4. Anon4fun

    April 1, 2013 at 1:36 PM

    Adask: “Every financial institution that engages in fractional-reserve banking exists only insofar as it exudes an aura of trustworthiness that’s believed by its depositors.”

    That is why, in the 19th and early 20th centuries, they built banks to look like classical (i.e. pagan) temples, complete with paneled ceilings and marble walls. Evidently this evoked trust in the typical customer.

    Not only are deposits with fractional reserve banks inherently risky, but fractional reserve lending is inherently inflationary for the obvious reason that it allows bankers to engage in their favorite pastime: creating money (or its functional equivalent) out of nothing.

    The same principle applies whether the money (or its functional equivalent) is backed by commodity reserves or merely nice thoughts.

    • Prissy

      April 1, 2013 at 2:38 PM

      Oh !! Anon4fun !!! Stop it !!! Stop it !!! Stop it !!! You ARE just TOO MUCH !!!

    • Doug

      April 6, 2013 at 4:41 AM

      If Americans had as much real faith in God, the Almighty Creator of infinite universes, as they have in the putrid financial system they readily participate in for the sake of convenience … we’d be free at last !

      Even the very elect have been fooled (beguiled, meaning totally seduced) … I mean how sick is it that a church accepts the freemasonic filthy lucre we call FRNs ???

      • Jerry Sparks

        April 6, 2013 at 2:53 PM

        ….filthy lucre we call FRNs ???
        I can just see any Prophet,, saying: “Thus saith the Lord, all ferns are mine.” BUT, what do you use as a medium of exchange for tithes & offerings? Back when I was “fairly well off” financially, I gave an offering of over $5,000 in Prospector Rounds. However, I purchased them with frns, about 7 + for each Round.But frns have always been accepted too

        I have just come across a “very interesting” website called, World’s Last Chance.” It has really made me have 2nd thoughts about “time.” E.g.,when a day starts & what is said IS supported by Scripture. E.g., In the end of the sabbath, as it began to dawn toward the first day of the week,…..” “In the end of the Sabbath, as it began to dawn towards the first day of the week, ….” < Webster Bible Translation

        My understanding of "dawn" is in the or a wee hour of morning,whereas "dusk" is in the or a wee hour of evening. Whatcha think? < As Alfred would say. I keep forgetting to give credit to many of those whose "excerpts" I use.

    • Jerry Sparks

      April 6, 2013 at 2:26 PM

      Excuse me for changing the subject but how is this done,e.g., BUY, without money?
      Isaiah 55:1, > Come, buy wine and milk without money…

  5. Jerry Sparks

    April 1, 2013 at 4:33 PM

    April 1, 2013 at 2:38 PM
    @ > Oh !! Anon4fun !!! Stop it !!! Stop it !!! Stop it !!! You ARE just TOO MUCH !!!
    Prissy, are you a.k.a. “tellum D Troof?”

  6. Anthony Clifton

    April 2, 2013 at 10:27 AM

    Good Time Charlies’ Got the Blues…

    where do Stupid Idiots go to collect a reward for being so STOOOPID….all the time no matter what ?

    All kinds of information is readily available for those with the stones and industry to look into the well and into the mirror…..

    many strokes fell great oaks…. & “The journey of a thousand miles begins with the first step”.

    sometimes it’s just a matter of what road you’re on…

    • Jerry Sparks

      April 2, 2013 at 8:32 PM

      And he said,:”I’m not a good singer.” Well, he told the truth. He is a fabulous singer!!!

  7. mvg-avg

    April 3, 2013 at 1:46 PM

    This is a real nasty pullback in silver and gold sure to throw of anyone with a weak stomach,it is difficult .

  8. Iakovos Alhadeff

    July 4, 2014 at 2:15 PM

    The Socialist Anti-Semitic Myth of the Creation of Money out of Thin Air


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