Fictional Reserve Lending Is the New Official Policy


Official policy finally caught up with reality. Reserves are fictional.

Official Announcement

With little fanfare or media coverage, the Fed made this Announcement on Reserves.

As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.

Amusingly, a few days ago yet another article appeared explaining how the Money Multiplier works. The example goes like this: Someone deposits $10,000 and a bank lends out $9,000 and then the $9,000 gets redeposited and 90% of the gets lent out and so an and so forth.

The notion was potty. That is not remotely close to how loans get made. Deposits and reserves never played into lending decisions.

What's Changed Regarding Lending?

Essentially, nothing.

The announcement just officially admitted the denominator on reserves for lending is zero.

There are no reserve lending constraints (but practically speaking, there never were).

Fictional Reserve Lending Flashback

I wrote about this in December of 2009 in Fictional Reserve Lending and the Myth of Excess Reserves.

The flashback is amusing as I reference a number of people worried about hyperinflation.

Here are the facts of the matter as I explained in 2009.

Money Multiplier Theory Is Wrong

  • Lending comes first and what little reserves there are (if any) come later.
  • There really are no excess reserves.
  • Not only are there no excess reserves, there are essentially no reserves to speak of at all.

The rationale behind the last bullet point pertains to banks hiding losses. Regulators suspended mark-to-market accounting.

When Do Banks Make Loans?

  1. They meet capital requirements
  2. They believe they have a creditworthy borrower
  3. Creditworthy borrowers want to borrow

All three requirements must be met.

  1. Banks generally do not lend if they are capital impaired.
  2. Clearly someone must want to borrow.

Point two is worthy of discussion.

Banks may not have a creditworthy borrower, they just have to believe it, or they have an alternate belief that applies. In 2007 banks knew full well they were making mortgage liar loans.

So Why Did They?

Because banks bought into the idea home prices would not go down so they did not give a rat's ass if someone was out on the street. All they cared about was the quality of the loan. If Home prices appreciated, they were covered.

From a bank lending aspect, nothing has changed. Neither reserves nor deposits never entered into the picture.

Denominator Officially Zero

The denominator on lending is now officially zero. But nothing really changed. The Fed was always ready, willing, and able to supply unlimited reserves.

The only thing that's new is the official announcement that reserves are fictional.

Capital Concerns in 2009

There are capital concerns, but note that in March of 2009 the Fed suspended mark-to-mark accounting.

That was the key announcement that launched the bull market.

Capital Concerns Now

There are still capital concerns, but the Fed stepped up to the plate and is willing to buy corporate bonds.

Guess who is going to unload as much questionable junk as possible and guess who will buy it.

Banks know they have losses but hey will not admit them.

All it takes to mask them is a clever swap takes the assets off the balance sheet of the banks and temporarily hides them on the balance sheet of the Fed.

What About New Lending?

Hiding junk is not new lending. It is not new production. And it is not new hiring.

To achieve real growth we need new production, not hiding of losses.

Losses and Zombies

Once again, the Fed has chosen to hide losses and shelter zombie corporations.

This will be a drag on any recovery.

All Excess Now

Hey, look on the bright side.

By definition, all reserves are now excess reserves. Banks can collect on all reserves.

The rate may not be much, but Interest on Excess Reserves = Interest on Reserves

Ain't life grand?

But, But, But, But

  1. Unemployment Claims Spike to 3.28 Million, New Record High
  2. Coronavirus Trend: One in 10 of Those Hospitalized Die
  3. Retail Grinds to a Halt as 47,000 Stores Close
  4. US Output Drops at Fastest Rate in a Decade

But banks are saved. What more could you possibly want?

Meanwhile, Nothing is Working Now (Except for Banks)

For a 20-point discussion of where we are headed, please see What's Next for America?

Mike "Mish" Shedlock

Comments (19)
No. 1-12

The leeches can now, even officially, lend themselves and their friends as much money as they need, in order to buy the "rights" to all their serfs' value add in perpetuity. No compounding interest at all, to prevent them from simply holding on to it all while only paying "interest", not principal.....

Anyone who don't realize how unlucky they are not to live in a Chinese communist dictatorship by now, is simply plain illiterate. The commies at least inconvenienced themselves to keep people somewhat safe from a virus. Our leeches didn't do that. Instead focusing on arranging to completely enslave anyone who survive despite them, permanently.

Yes, it is that bad. WW3, if we're lucky, will be a blessing. Nukes and all.


The entire financial and monetary systems are now a complete sham.

With 30%+ unemployment, nobody will be paying ANYTHING back. Vast swathes of what used to be our economy and financial system will be nationalized and the Fed will be printing like there's no tomorrow. We are now in the Keynesian Endgame and there is no way out.


Not sure I get it.....does this mean that we don't need to worry about "bail-ins" if a bank loses too much on their portfolio of loans? That the Fed will just give them money in exchange for some fictional value that is placed on their bad loans?


I didn't remember the year, but I remember that 2009 post and here we are again. Time certainly flies. Thanks Mish for all the commentary regarding COVID-19 and its economic impact as the USA crosses 100,000 cases.


Is this why zombies haven't blown up yet? Or do I just have no patience?


Watching the Fed throw trillions of dollars around all over the place makes me wonder what early 60’s Republican Congressman Everett Dirksen would think who said “A billion here, a billion there and pretty soon you’re talking about some real money.”Also with regard to the trillion dollar Congressional bailout deal reminds me of another Dirksen quote “When a member of the House moves over to the Senate, he raises the IQ of both bodies.”


Even before the financial crisis banks were holding reserves in excess of the required amounts, likely for clearing purposes. Other central banks dropped reserve requirements some time ago (e.g. Bank of Canada).

Regarding the money multiplier, you're right, this doesn't apply to individual banks. But it does apply to the system as a whole, but based on reserves banks choose to hold.


In light of coronavirus, the banking rules and economy dont really matter anymore. Dont get me wrong but this post by Mish doesnt matter to anyone outside of banking. It wouldn't shock me if the banking system were dissolved and the government took it over. We havent gotten to the bottom of this crisis.

Runner Dan
Runner Dan

"What's Changed Regarding Lending? Essentially, nothing."

BINGO!!!!!!!!!!!!!! The announcement really was much 'ado about nothing. Fed might have well have said "hey gang, I'm sure you already knew this, but the new rule is there are no rules..."

"To achieve real growth we need new production, not hiding of losses."

BINGO!!!!!!!!!!! Your not going to get growth if you smother every "green shoot" with a mountain of debt. Just ask the youth. Why would any young person start their own business when all the profits go to an insolvent bank? Really is generational warfare by other means.


"By definition, all reserves are now excess reserves. Banks can collect on all reserves."

And that also is no change as previously the Fed paid the same rate of interest on both required (IORR) and excess reserves (IOER). Each had its own rate but they were always the same when I looked at them. That rate is currently a whopping 0.1%.


"We have three weapons..."
I think it iis obvious to those not hampered by vested interest that the financial industry is a ponzi that pays lip service (possibly literally) to capitalism via something like neo-liberalism which comes down to how it benefits others as we run the world and make ourselves exceedingly, sickeningly wealth. I am sure organized crime syndicates (other than Wall Street, banks, FED, government) have said much the same thing. So I find it disingenuous when analysts decry the corruption of the FED, banks, ... Its a given.
More useful would be discussion of better alternatives and how we might get there. Yes its good to remind people a bit but also good to be constructive. A look at last 200 years of finance in US puts things in perspective.
Odd that the empire was on verge of insolvency with fake economy and now a virus forces them to bail out the usual tbtf's. Taht scene from good fellas...


I don't understand, for me all this drama is semantics. Ok there is no more 'reserve' constraints but there is capital constraints (capital ratio is about ~10%), practically it is the same as in this is fractional lending (you need to hold 1$ in capital to lend 10$). Or am I missing something?

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