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Scary Fragility Coming to the US banking System

[Experienced]

Back in the day, it took days to move money from one financial instiutuion to another.

As time went on this time window has become shorter.

The US Fed is now planning to institute a system where any domestic transaction between financial institutions, irrespective of the time of day of or weekends will happen immediately.  The plan is to have this system in place by the end of this month.

Why is this seemingly innocuous thing important?

Banks in the US have a requirement to keep 10% of their assets in what is called reserve deposit in order to have the actual cash available for people to withdraw money.  Under the new system, there is the possibility that there could be a run on a bank of greater than 10% in real time and bankrupt the bank before regulators can do anything about it.  This is a serious risk now being attached to the US banking system.

The banking system is the backbone of the whole capitalist society and if this backbone is weakened, it weakens the whole system

Is this a real concern?

We have already seen this year three major regional bank failures due to people withdrawing money quickly from the banks.  Regulators were able to limit the damage due to delays in prorcessing the money.  If we see a recession as I am predicting later this year, then this new policy by the Fed could make this much worse with the potential for many bank failures.

[meritmat]

  How would this effect the Canadain banking system?   

[Torontojay]

Hi Experienced. There is no longer a 10% reserve requirement for bank reserves and many people don't know about this. This changed as of March 26,2020.  https://www.investopedia.com/terms/r/requiredreserves.asp#:~:text=Reserve%20requirements%20are%20a%20tool,to%20the%20COVID%2D19%20pandemic.

[Experienced]

Thanks for that Jay.....not sure how I missed that  That change in 2020 just makes the new policy even more scary