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Proof of Deposits Day - Does the Bank Have Your Money?Share on LinkedinDownload

Proof of Deposits Day - Does the Bank Have Your Money?

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The Fed Lowers Reserve Requirement to 0%

If you went to the bank, would they have all your money available for withdrawal?

Starting March 26th, 2020, they won’t have to.

On March 15th 2020, The Federal Reserve, the central bank of the United States, announced they would lower reserve requirements to zero for the first time in history.

This change takes place tomorrow. Here’s what that means.


What is The Reserve Requirement Ratio?

The reserve requirement, or cash reserve ratio, is a regulation put in place by most of the world’s central banks, who manage the currencies, money supplies, interest rates, and commercial banking systems of their countries.

For example, if the reserve requirement is 10%, this means that for every $1 that clients deposit at a bank, the bank must have $0.10 set aside as reserves. The bank can then lend out or invest the other 90% ($0.90).

Lower cash reserve ratios allow for a greater flow of money throughout the economy so that people can take out loans for things like houses and businesses, while banks make money on loan interest.

However, in times of crises, low reserve requirements can end in disaster for commercial banks, when many clients try to withdraw their money from the bank at the same time (called a “bank run”):

Bank run on American Union Bank, New York City during the Great Depression on April 26, 1932
Bank run on American Union Bank, New York City during the Great Depression on April 26, 1932. Image credit: The Unwritten Record, National Archives

Bank runs can also happen in spite of things like deposit insurance. During the Great Recession of 2007-2009, Washington Mutual Bank (WaMu) clients, fearing that WaMu was going out of business, withdrew $16.5 billion in 10 days.

To stop the run on WaMu, the US federal government stepped in by seizing WaMu and selling it to America’s largest bank, JP Morgan Chase & Co. The government seized WaMu since they feared a full bank run on WaMu would’ve destroyed the federal banking insurance fund ($45 billion). (This is the Federal Deposit Insurance Corporation - FDIC - insurance you see on bank accounts).

That’s scary to think about when you consider that all savings deposits at the time equaled $3.96 trillion. That’s 88 times the federal banking insurance fund at the time.

Note: Since 1933 (when the FDIC was created), no one has ever lost FDIC-insured funds. The US government would very likely not allow the FDIC to fail. That being said, it's probably not a bad idea to check for Proof of Deposits! (See below)


Proof of Deposits Day (3/26/20) - Does the Bank Have Your Money?

So if the reserve requirement for banks is 0%, do banks have to have (some) client deposits available in a safe somewhere?

Technically, they don’t.

In homage to Bitcoin’s annual Proof of Keys event, where Bitcoiners withdraw all their Bitcoin from centralized crypto exchanges to prove that they own their Bitcoin, we at Exodus propose an annual tradition called Proof of Deposits Day, where people around the world withdraw at least some of their money from the bank (we’re not trying to start a bank run!).

This way, people can prove that at least some of their money still exists and that banks are the financially responsible guardians of our money that they’re supposed to be.

More explanation on what Proof of Keys is.

Conclusion: Is There an Alternative?

No one is saying to start a run on the banks!

However, due to the coronavirus, we are living in unprecedented times, and it’s probably not a bad idea to have some cash on hand for emergencies. Even if it’s just $100 or $1,000, the bank should have that for you, right? Just remember to keep that social distance when you go to the bank!

Also, is there an alternative for situations like this? After all, it isn’t always practical to keep lots of cash on hand. What if there was a form of money out there that no one controlled except for you - not a bank nor a government. And what if that money was easily transportable due to its digital nature?

Well, a bit over 10 years ago, such a form of money was released to the world. It’s name is Bitcoin (BTC).

If you want to take part in Proof of Deposits Day, be sure to share this article and tag #ProofOfDeposits.

Information provided is for informational purposes only and should not be considered financial advice. Investing in crypto assets is speculative and carries a high degree of risk; you may lose some or all of the money that is invested. Past performance is not indicative of future results.

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