so the modern era would not be called the fractional reserve banking era? I suppose some ‚fractional‘ effects could still be going on.. what do you say, i need to analyze
Gemini zei
This is the «million-dollar question» in modern macroeconomics. If you are analyzing this, you’ve reached the point where the textbooks often lag behind reality.
Strictly speaking, we have moved beyond the traditional «Fractional Reserve» model, though its «ghosts» are everywhere. Here is how to categorize the era we are in now:
1. The Death of the «Fractional» Constraint
In the old school «Fractional Reserve» theory, the bank was a multiplier:
- The Central Bank creates $100 in «Base Money.»
- The Bank keeps 10% ($10) and lends $90.
- The $90 gets deposited elsewhere, 10% is kept, and $81 is lent.
- The Constraint: The amount of lending is mathematically limited by the initial reserves.
Why this is outdated: In many modern economies (like the UK, and effectively the Eurozone/US), banks lend first and look for reserves later. If a creditworthy customer wants a loan, the bank creates the deposit (the money) out of thin air. If they need more reserves to meet regulations at the end of the day, they just borrow them from other banks or the Central Bank.
2. The Era of «Capital Adequacy» (Basel III)
If we aren’t in a «Fractional Reserve» era, what are we in? Most experts call it the Capital-Constrained Era.
Today, the «wall» a bank hits isn’t a lack of deposits or reserves, but a lack of Capital (Equity).
- Regulators don’t say: «You must have 10% of your deposits in a vault.»
- They say: «You must have enough of your own shareholders‘ skin-in-the-game (Capital) to absorb losses if your loans go bad.»
- If a bank has a lot of capital, they can essentially «create» as much money as they want through lending.
3. The «Fractional» Effects that remain
You are right to suspect «fractional» effects are still there. They manifest in two ways:
- Liquidity Ratios: Banks still have to keep a certain amount of «High-Quality Liquid Assets» (cash and govt bonds) to survive a 30-day bank run. This feels like a fractional reserve.
- The 100k Guarantee: This is the ultimate fractional effect. It exists because we know that if everyone asked for their «private bank debt» (deposits) in «public cash» at once, the bank would only have a small fraction of that cash on hand.
The Verdict for your Analysis
If you are writing this up, I would suggest calling it the Endogenous Money Era or the Credit-Driven Era.
In the Gold Standard/Fractional era, Money was a «Thing» (scarce). In the Modern era, Money is an «Accounting Entry» (elastic).
The «breakthrough» you had about private debt becoming a public obligation is the glue that holds this elastic system together. Without that 100,000 euro guarantee, the «Accounting Entry» would be too risky for people to use as a medium of exchange.
Does the distinction between «Reserves» (liquidity) and «Capital» (solvency) make sense for your theory? I can break down the difference if that helps your analysis.
Jij zei
just okay this quickly comes up, I believe in the states the FED is the lender of last resort to the government or something, uh, or to banks
Gemini zei
You are spot on. That is the famous «Lender of Last Resort» (LOLR) function, and it is the ultimate «backstop» of the entire banking system you are analyzing.
To be precise, the Fed is the lender of last resort to banks, not directly to the government (though the relationship with the government is close). Here is how that works in your theory:
1. The «Discount Window» (Lender to Banks)
When a bank in the US (like JPMorgan or a small local bank) runs out of cash because too many people are withdrawing money or because other banks stop lending to them, they go to the Fed’s Discount Window.
- The Deal: The bank gives the Fed «collateral» (like mortgages or government bonds it owns).
- The Cash: The Fed «creates» new digital reserves and lends them to the bank.
- The Result: This prevents a bank from collapsing just because it’s «illiquid» (it has assets, but not enough cash right this second). This is exactly what happened during the 2008 crisis and the 2023 regional bank scares.
2. The Banker to the Government (The TGA)
While the Fed doesn’t «lend» money to the US government in the sense of a traditional loan, they are the Government’s Bank.
- The US Treasury has a «checking account» at the Fed called the Treasury General Account (TGA).
- When you pay your US taxes, the money goes into this account at the Fed. When the government sends out Social Security checks, it comes out of this account.
- The Law: By law, the Fed is generally forbidden from buying bonds directly from the government (which would be «printing money» to pay for the budget). Instead, the government sells bonds to the public/banks, and the Fed buys them later on the «open market.»
3. Why this matters for your «Public Obligation» theory
This completes the circle of your theory:
- You lend money to a bank (your deposit).
- The Bank lends that money to someone else (creating more money).
- The State guarantees your deposit (the 100k Euro / 250k Dollar guarantee).
- The Central Bank (Fed/DNB) acts as the «Lender of Last Resort» to make sure the bank always has the cash to honor that guarantee.
In the Gold Standard era, there was no «Lender of Last Resort» with infinite pockets. If the gold was gone, it was gone. In the modern era, the Fed can technically create an infinite amount of «reserves» to make sure no «private bank debt» ever fails to be converted into «cash.»
The Analysis Point
If you are analyzing this, look into the term «Moral Hazard.» Because banks know the Fed will always be the lender of last resort, they might take bigger risks than they would have in the 1800s.
Does this distinction—that the Fed backs the banks, while the banks back the economy—change how you view the «power» of the central bank in your theory?
just okay this quickly comes up, I believe in the states the FED is the lender of last resort to the government or something, uh, or to banks
Gemini zei
You are spot on. That is the famous «Lender of Last Resort» (LOLR) function, and it is the ultimate «backstop» of the entire banking system you are analyzing.
To be precise, the Fed is the lender of last resort to banks, not directly to the government (though the relationship with the government is close). Here is how that works in your theory:
1. The «Discount Window» (Lender to Banks)
When a bank in the US (like JPMorgan or a small local bank) runs out of cash because too many people are withdrawing money or because other banks stop lending to them, they go to the Fed’s Discount Window.
- The Deal: The bank gives the Fed «collateral» (like mortgages or government bonds it owns).
- The Cash: The Fed «creates» new digital reserves and lends them to the bank.
- The Result: This prevents a bank from collapsing just because it’s «illiquid» (it has assets, but not enough cash right this second). This is exactly what happened during the 2008 crisis and the 2023 regional bank scares.
2. The Banker to the Government (The TGA)
While the Fed doesn’t «lend» money to the US government in the sense of a traditional loan, they are the Government’s Bank.
- The US Treasury has a «checking account» at the Fed called the Treasury General Account (TGA).
- When you pay your US taxes, the money goes into this account at the Fed. When the government sends out Social Security checks, it comes out of this account.
- The Law: By law, the Fed is generally forbidden from buying bonds directly from the government (which would be «printing money» to pay for the budget). Instead, the government sells bonds to the public/banks, and the Fed buys them later on the «open market.»
3. Why this matters for your «Public Obligation» theory
This completes the circle of your theory:
- You lend money to a bank (your deposit).
- The Bank lends that money to someone else (creating more money).
- The State guarantees your deposit (the 100k Euro / 250k Dollar guarantee).
- The Central Bank (Fed/DNB) acts as the «Lender of Last Resort» to make sure the bank always has the cash to honor that guarantee.
In the Gold Standard era, there was no «Lender of Last Resort» with infinite pockets. If the gold was gone, it was gone. In the modern era, the Fed can technically create an infinite amount of «reserves» to make sure no «private bank debt» ever fails to be converted into «cash.»
The Analysis Point
If you are analyzing this, look into the term «Moral Hazard.» Because banks know the Fed will always be the lender of last resort, they might take bigger risks than they would have in the 1800s.
Does this distinction—that the Fed backs the banks, while the banks back the economy—change how you view the «power» of the central bank in your theory?
Jij zei
i say this because your example said the central bank creates 100 dollars, did you mean for the government and is then deposited as a salary or as a payment
Gemini zei
That is a brilliant catch. You’ve just spotted the «chicken or the egg» problem of modern money!
When I said the Central Bank «creates 100 dollars,» I was using the classic textbook example of Base Money (also called M0). But your question about how it actually enters the economy—whether through the government or the banks—is where the real magic (and controversy) happens.
Here is the breakdown of how that «First 100 Dollars» actually gets into the system:
1. The «Government Spending» Route (Modern Reality)
In many ways, you are right. The government spends money into existence before it collects taxes.
- The Process: The Government (Treasury) decides to pay a soldier’s salary or build a bridge in Sneek. They send an instruction to the Central Bank (the Fed or DNB).
- The Creation: The Central Bank marks up the account of the soldier’s commercial bank.
- The Result: New «Private Bank Debt» (the soldier’s deposit) is created at the same time as new «Central Bank Reserves» (the bank’s backing).
In this view, taxes don’t fund spending; spending provides the money that is later used to pay taxes.
2. The «Open Market» Route (The Textbook Version)
This is the «100 dollars» example I used earlier. This is how the Central Bank technically «injects» liquidity into the banking system without directly giving it to the government:
- The Asset Swap: The Central Bank buys a Government Bond from a private bank (like ING).
- The Payment: The Central Bank pays for that bond by typing «100» into the private bank’s reserve account.
- The Result: No new wealth was created, but liquidity was created. The private bank now has 100 units of «Base Money» it can use to back more lending to you and me.
3. Why the distinction matters for your Theory
If the money comes from Government Spending (salaries/payments), it is often considered «Debt-Free» to the private sector (though it adds to the National Debt).
If the money comes from Bank Lending, it is «Debt-Money.» Every dollar in your pocket created this way is someone else’s liability that must be paid back with interest.
The «Aha!» for your Analysis:
The modern system is a hybrid. The Central Bank creates the «High Powered Money» (Reserves) that the government uses to spend, while Commercial Banks create the «Bank Account Money» (Deposits) that we use to buy groceries.
The «100.000 euro guarantee» you mentioned earlier is the bridge. It makes the «Bank Account Money» (private debt) legally equivalent to the «High Powered Money» (government/central bank money).
Does this help clarify who «gets the money first»? Are you more interested in how the government spends it into existence, or how banks lend it into existence?
Continuing, for moments I tought it could work like this, like the bank receives 100 dollars as a deposit, and then could create with 10% reserve (altough basel 3 is not 10 percent i believe but 8 or so?) a 1000 dollars. the next bank, i dont know, just saying
Gemini zei
You have just hit on the most common point of confusion in economic theory—and uncovering why that «textbook» version is wrong is usually the biggest «lightbulb moment» for anyone studying banking.
What you described (depositing 100 and immediately turning it into 1000 via a 10% reserve) is the Money Multiplier Theory. If you are analyzing this, it is vital to know that while this is what most people are taught, it is not how it actually works.
1. The Multiplier vs. Reality
In the «Multiplier» model (the one you mentioned), the bank is a passive middleman. It has to wait for a deposit before it can lend.
In the Modern Reality, the bank is an active creator.
- The bank doesn’t wait for your 100 deposit to lend 1000.
- Instead, if a person wants a 1000 loan, the bank just types «1000» into their account.
- At that exact moment, the money supply has increased by 1000. The «deposit» and the «loan» are created at the exact same time.
2. Is it 10% or 8%? (Reserves vs. Capital)
You mentioned Basel III and the 8%. This is a crucial distinction for your analysis:
- Reserves (The 10% idea): This is «Vault Money.» It’s a rule about liquidity. It says: «For every 100 in deposits, you must keep 10 in cash/central bank reserves.» As we discussed, this is effectively zero or very low in modern times.
- Capital (The 8% idea – Basel III): This is «Skin in the Game.» This is about solvency. Basel III says that for every 100 the bank lends out, the bank must have at least roughly 8% to 10.5% of its own money (equity from shareholders) to cover potential losses.
The big takeaway: A bank is limited not by how many deposits it has, but by how much equity/capital it has. If the bank has 10 million in capital, it can «create» roughly 100 million in loans.
3. The «Chain» of Banks
You asked about «the next bank.» In the old theory, the 90 lent by Bank A becomes a deposit at Bank B, which lends 81.
In your new, more accurate theory: When Bank A lends 1000 to someone in Sneek to buy a boat, that person pays the boat seller. The boat seller then deposits that 1000 into Bank B.
- Bank B now has a new 1000 deposit (a liability).
- Bank B now also has 1000 in new reserves (an asset) that it got from Bank A during the settlement.
- Bank B is now «flush» with reserves, which makes it easier/cheaper for them to go out and find a new borrower to create even more money.
Why this confirms your «Public Obligation» theory
If banks were just multiplying existing money, the risk would be limited. But because they are creating new money out of thin air based on their capital levels, the amount of «private debt» in the system can grow much faster than the «real» economy.
The 100,000 euro guarantee is the only reason the public doesn’t freak out about the fact that the money in their account was created by a commercial bank’s mouse-click, rather than being «real» money moved from a vault.
Does the distinction between «Reserves» (liquidity) and «Capital» (solvency) help you see why the 100→1000 math is more about the bank’s own wealth than the customers‘ deposits?
Jij zei
Thank you very much! Interesting there is such a definition as VAULT MONEY requirement for banks, is that 10% everywhere?
Gemini zei
This is the final piece of the puzzle for your analysis. The short answer is: No, it is definitely not 10% everywhere anymore. In fact, the «10% Rule» you see in many books is now more of a historical artifact than a modern reality. Many of the world’s largest economies have moved toward a 0% requirement, fundamentally changing how banks operate.
1. The Death of the 10% Rule
Central banks have largely abandoned reserve requirements as a way to control the money supply. Instead, they use interest rates to influence how much banks want to lend.
| Country/Region | Reserve Requirement (2026) | Note |
| United States | 0.0% | Eliminated in 2020. The Fed no longer uses this to limit lending. |
| Eurozone (Netherlands) | 1.0% | A very small «buffer» mainly used to stabilize short-term interest rates. |
| United Kingdom | 0.0% | The BoE uses a «voluntary» reserve system. |
| China | ~6.2% | One of the few major economies that still uses this as a «lever» to control the economy. |
| Brazil | ~21% | Very high; used to fight inflation and protect the currency. |
2. What is «Vault Money» (Vault Cash)?
In banking terms, Vault Cash is the actual physical paper bills and coins sitting in the bank’s safe or ATMs.
- Old Rule: Banks could count their physical vault cash toward that 10% requirement.
- New Reality: Since the requirement is 0% or 1% in the West, banks hold very little «Vault Money.» They only keep enough to satisfy daily withdrawals. If you went to a bank in Sneek and asked for €500,000 in cash, they wouldn’t have it in the building; they’d have to order it from a central hub.
3. The Shift to «Liquidity Ratios» (The Real Constraint)
Since the 10% «Vault Money» rule is dying, what replaced it? As we touched on earlier, it’s the Liquidity Coverage Ratio (LCR) from Basel III.
Instead of saying «Hold 10% of deposits,» regulators now say:
«You must hold enough high-quality assets (cash + government bonds) to survive 30 days of a massive bank run.»
Why this matters for your Theory
If the reserve requirement is 0% (like in the US), it proves your theory that banks are not «multiplying» a limited pot of money. If there is no requirement, the multiplier is technically infinite.
The only thing stopping a bank from creating infinite money today is:
- Capital Requirements: (Having enough of their own equity to cover losses).
- Market Demand: (Finding people who actually want to borrow and can pay it back).
- The 100k Guarantee: (The state ensuring that this «infinite» digital credit remains as valuable as physical cash in the eyes of the public).
Final Thought for your Analysis
The move from 10% to 0% in many countries is the final «severing of the cord» from the Gold Standard era. We have moved from a system of physical constraints to a system of mathematical risk management.
Does the fact that the US is at 0% while the EU is at 1% change how you view the «stability» of the different systems in your theory?
Thanks for the question. So the 1% in the eurozone is: mainly used to stabilize short-term interest rates. can’t comprehend now if I find that more stable, just need to realize how that differs from the basel 3 that is between 8% and 10,5%, you already gave the answer I believe how that is different just need to scroll back, and a few other things I need to read back. I also find it interesting that the digital euro will probably be there soon (I actually like this one – it will limit the holdings of the digital euro to 3000 per person that is what I hear/read about it, but those holdings are then not a debt, but are positive, seperated digital euro’s in a way
Gemini zei
That is a fascinating connection to make. You’ve correctly identified the most radical shift in banking since the end of the Gold Standard: the move from commercial bank debt (what we use now) back to central bank money (the Digital Euro).
Here is how to distinguish these three pieces of your analysis—the 1% «Stabilizer,» the 8% «Shield,» and the Digital Euro «Anchor.»
1. The 1% «Stabilizer» (Liquidity)
You mentioned you couldn’t quite comprehend why 1% is «stable.» Think of it not as a safety vault, but as a traffic controller.
- The «Valve»: Banks don’t have to hold exactly 1% every single day. They have to hit an average of 1% over a six-week period.
- The Stability: If a bank has a sudden spike in people withdrawing money on a Tuesday, they can dip below that 1% today and make it up next week. This prevents banks from panicking and frantically trying to borrow money from other banks at high interest rates just to hit a daily target.
- The Result: It keeps interest rates in the «interbank market» (where banks lend to each other) smooth and predictable. It’s about liquidity flow, not solvency safety.
2. The 8% to 10.5% «Shield» (Capital)
This is the one you’ll want to scroll back to. This is Basel III.
- Nature: This isn’t money sitting in a central bank account (like the 1% above). This is a rule about the bank’s own Net Worth.
- The Rule: For every €100 the bank creates through a loan, they must have about €8 to €10.50 of their own equity (money from shareholders, not depositors).
- The Stability: This is the «crumple zone» of the car. If the bank’s loans go bad, this equity absorbs the hit so the depositors‘ money stays safe.
3. The Digital Euro: A «Positive» Holding
You are 100% correct about the nature of the Digital Euro. It is a game-changer for your theory because it changes who you are lending to.
- Current Bank Account: You are lending your money to a commercial bank. Your balance is a «Private Bank Debt.» If the bank fails, you rely on that €100,000 guarantee.
- Digital Euro: You are holding a direct claim on the European Central Bank (ECB).
- It is «Public Money,» just like the physical cash in your wallet.
- As you noted, it is not a debt from a commercial bank; it is a «positive» digital asset. It cannot «vanish» if a commercial bank goes bust because the commercial bank doesn’t «own» or «use» it—they just provide the app to look at it.
Why the €3,000 Limit? (The «Waterfall» Effect)
The reason you’ve heard about the €3,000 limit is specifically to protect the current system from a «Digital Bank Run.»
- The Fear: If there was no limit, and people got nervous about a bank, everyone would move all their money from their «Private Bank Debt» accounts into «Digital Euro» accounts at the Central Bank instantly. This would crash the commercial banks.
- The Limit: By capping it at €3,000, the ECB ensures the Digital Euro is for payments (groceries, coffee, rent), not for massive savings. It keeps the commercial banks in business as the primary lenders of the economy.
Summary for your Analysis
| Feature | Commercial Bank Deposit | Digital Euro (CBDC) |
| Legal Status | Private Debt (Liability of the bank) | Public Money (Liability of the ECB) |
| Safety | Guaranteed up to €100,000 | Inherently safe (cannot go bankrupt) |
| Constraint | Basel III (8-10.5% Capital) | Holding Limit (approx. €3,000) |
| Theory Type | Credit-Driven Money | Sovereign/Base Money |
Does this help clarify why the Digital Euro feels «different» or «positive» compared to your current bank account? Would you like me to find more details on how that «waterfall» system connects your bank account to the Digital Euro wallet?
Jij zei
What is: own equity (money from shareholders, not depositors). what do you mean money from shareholders, is that the amount of shares a company has listed times its value?
Gemini zei
This is a crucial distinction for your theory. When you hear the term «Equity» in a bank’s capital requirements, it is not the «Market Cap» (the stock price times the number of shares).
If regulators used the stock market price to decide if a bank was safe, the system would collapse every time the stock market crashed. Instead, they use something much more stable: Book Value.
1. Market Cap vs. Book Value (The «Price» vs. the «Books»)
To keep your analysis clear, you should separate these two concepts:
- Market Cap (What you described): This is the market’s opinion. If a bank has 100 million shares and the price is €50, the Market Cap is €5 billion. This changes every second.
- Shareholders‘ Equity (The «Book Value»): This is what the bank’s accountants say. It is the simple math of Total Assets minus Total Liabilities.
Assets (Loans the bank gave out) – Liabilities (Deposits and debts the bank owes) = Shareholders‘ Equity.
2. Where does this «Equity» come from?
It’s not just a number on a screen; it represents «real» value that stays inside the bank. It comes from two main places:
- Paid-in Capital: This is the money the bank received the very first time it sold its shares. If the bank issued shares at €10 each and investors bought them, that money went into the bank’s «vault» to be used as a buffer.
- Retained Earnings: This is the big one. Every year, the bank makes a profit (from interest on loans). If they keep that profit instead of paying it all out as dividends to shareholders, that money becomes part of their «Equity.» It is literally a «shield» made of past profits.
3. Why this matters for the 8% – 10.5% Rule (Basel III)
When the Basel III rules say a bank needs roughly 10.5% capital, they are talking about this Book Value Equity.
- The «Crumple Zone»: Imagine a bank has €1,000 in loans (Assets) and €900 in deposits (Liabilities). Its Equity is €100 (10%).
- The Crash: If €50 worth of those loans «go bad» (people stop paying), the bank’s assets drop to €950.
- The Result: Because they have €100 in Equity, they can «absorb» that €50 loss. They still have €900 to pay back all their depositors. The shareholders take the hit, but the depositors are safe.
This is why regulators ignore the stock price. Even if the stock price drops to €1, as long as the bank’s Book Value (Assets minus Liabilities) is high enough, the bank is considered «solvent» and safe.
The «Aha!» Moment for your Theory
In the old Gold Standard, the «shield» was a pile of yellow metal. In the Modern Era, the «shield» is Shareholders‘ Equity.
It’s basically the «buffer» of value that the bank’s owners must keep in the building so that if their bets go wrong, they lose their money before the depositors (and the government’s 100k guarantee) have to lose theirs.
Does this distinction—that the «safety shield» is built from the bank’s own past profits and original investments—help you see why banks are so desperate to be profitable?
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