Canada’s Private Banks have no Reserve Requirements

In banking, there is a common term called “reserve ratios” or “reserve requirements”.

For simplification, all this means is that government imposed regulations on private banks says that they are required to keep a certain amount of “money” (it isn’t really money…they call it “capital instruments” - something that is “as good as money”) back in the vault for every dollar they loan out. For example, if the reserve ratio is 10%, it means that the bank would keep 10 cents in the vault for every dollar they loan out.

We have been conditioned via government education not to think of this at all or at least rationalize this as a good idea. There can be many examples cited in history where depositor’s confidence in their bank was shaken, and they all lined up all at the same time to withdraw their money - a run on the bank. These were ugly scenes as you can imagine. Panicking people screaming, yelling, and fighting with bank staff - and each other - to be in line first before the bank ran out of cash.

Full article here: http://gilliganscorner.wordpress.com/2008/04/06/canadas-private-banks-have-no-reserve-requirements/#comment-349