According to the Fed's website, commercial banks (including foreign/international banks) can actually create and loan out up to $14,500,000 per loan and not be required to have anything backing it (0% required reserve ratio).
Totally wrong. That document is not about loans. It doesn't even mention the word 'loan', except in the context of 'savings and loan associations'.
The document is about reserve requirements for deposits. Roughly speaking, if a bank takes in $100MM of deposits, it has to keep 10% of that ($10MM) in a way that's easy to access (either as cash in a vault, or as a deposit at the central bank). That way, if a depositor wants their money back, the bank will probably be able to give it to them.
If a bank has total deposits of less than $14.5MM, then the reserve ratio is 0%, instead of 3% or 10%.
Loans are created as deposits/accounts receivables which are included in net transaction accounts. Back that loan with a Credit Default Swap and you cant skirt any reserve requirements which was exactly what ripped the world economy in 2008.
This doesn't make any sense. When a bank creates a loan of $X and disburses the loan into the borrowers account, two things happen:
1) The bank's loan assets go up by $X
2) The bank's deposits go up by $X
Deposits are part of 'net transaction accounts'[0] so the bank would now need to hold 10% of $X in additional cash (e.g. in their vault).
So, it seems like the bank can create a loan of $X with just $0.1X of cash. Hang on, though. This assumes that the borrower just keeps the money in his bank account, which is unlikely. When she withdraws the money to spend it, the bank's reserve requirements go down by $0.1X (good) but they also need to pay out $X of cash (bad). So, it really did cost them $X to make $X of loan.
Now, if they have a CDS related to this loan, then they are insulated from the risk of default. But, how is that relevant to reserve requirements?
[0] "Net transaction accounts are total transaction accounts less amounts due from other depository institutions and less cash items in the process of collection."
I'm confused myself but thanks for debating. I was wrong about the 0% reserve ratio applying per account rather it is the sum total of all accounts held by the bank.
http://www.federalreserve.gov/monetarypolicy/reservereq.htm