Silicon Valley Bank and the Failure of Fractional Reserve Banking
With the apparent failure of Silicon Valley Bank (SVB) potentially causing a crisis in the American and even the global financial system, we will be treated to all manner of explanations, very few of which will accurately state the cause of these troubles: fractional reserve banking.
In modern banking there is little separation between warehouse and investment banking. The downside of investment banking is a potential loss of money since no investment can be a sure bet. The upside is the potential for a good return on money, the reward of taking on a degree of risk. In warehouse banking, such as personal or business checking accounts, the customer is not expecting any loss due to actions taken by the bank. The service rendered here is not expert investment advice; rather it is secure storage of funds and seamless payment transfer. The customer expects all of his money to be available to him at any time.
Rather than having to pay a small fee for the services of a warehouse account, depositors are, in fact, paid a small return for using these services. This is because modern banks lend out money stored in warehouse accounts. Since the warehouse depositor is entitled to access all his money on demand, the banking scheme requires the creation of new money out of thin air. Say the bank lends outs 5 percent of the value of a warehouse account. They still claim to have 100 percent of the value of the account available to the depositor. In theory, this works if what the bank invested the 5 percent in was successful: the return on investment brings the real value of the warehouse account back up to 100 percent, pays a gain t
Article from Mises Wire