Some comments from within the banking industry : LUSENET : TimeBomb 2000 (Y2000) : One Thread

The following is an exchange between an acquaintance and a "source within the banking industry". These views do not necessarily represent my own but I thought the conversation relevant.

In order to post this, I needed to keep my sources anonymous, thus many specific references have been replaced with substituted names in square brackets "[]". These are my edits, not the way it originally came to me. Still, I think the material is useful for promoting discussions...

So without further commentary:

In case of massive, panic-induced cash withdrawals, banks will just shut the doors until people go away. The regulators (Fed, FDIC, OCC) will go to the President and ask for a bank holiday, just as FDR once did in the Depression. (At beginning of his first term?) Anyway, this would be a short-term liquidity crunch, nothing really to cause the bank to fail in the bankruptcy sense. The solution is running the presses full-tilt until everyone got enough paper to satisfy their need to carry a bulging wallet.

> Now, I understand the basics of the banks don't
> have all the cash on hand because it goes out
> to investments such as loans, etc.

Right. I'll spare you the full lesson on creating money. Actually, when you bring in $100 in cash, the bank can create more than $100 in money thru the miracle of fractional reserves. They lend out $100-x (with x being the amount of reserves the requlators require, let's say 20%). This new, say, $80 loan is not given out in cash, but is just a credit to a new demand account for [Joe's Widgits, Inc.],

Since the bank now has another $80 available, it can lend $80-x or $64. And the $64 loan is credited to another DDA, and that $64 account supports about a $51 loan and on and on...

So, that initial $100 in cash ends up being lots more "money," but there's still only $100 cash in circulation. This example ignores lots of other complications, but you get the picture. The Fed sets the reserve requirements which determines how much money can be created. This is a crude but effective method of controlling the money supply--raise reserve reqts, contract the money supply, thereby increasing interest rates. Big effects on the economy, eventually.

The Fed, however, prefers to change the money supply thru open market operations--buying and selling Treasury securities. When the Fed buys Treasuries from banks, it is injecting reserves into the system that can be loaned out...this method is easier to control on a daily basis than the reserve reqt method.

Correspondingly, the FOMC (Fed Open Market Committee) may order the sale of Treasuries to banks, thus draining reserves from the system and contracting the money supply--again, the money supply, not cash.

The fractional reserves concept was discovered several hundred years ago and functions just fine. Banks know how much cash is needed for daily operations. When was the last time you went to the bank to withdraw and they said, "Sorry, fresh out today?"

The system will break down if "everyone" wants cash right now. Because under normal circumstances, there is no need for much of the stuff--you get direct deposit, use a credit or debit card, maybe have your YMCA monthly dues direct debited from your account...All these money flows no longer are carried out in cash. MUCH cheaper to do it electronically rather than physically.

> What I don't know is, if a bank fails, are all the loans
> from that bank called in? Or do they cease to exist?
> Or what happens?
> If one has a [bank name] auto loan, or a [bank name]
> mortgage, and [bank name] goes belly up due to massive
> cash withdrawals, what happens with the loan?

Sorry, you're not off the hook. The money is owed to the bank's receiver in the case of failure. Just like if you buy a computer on credit from [XYZ Computers], on their credit, and the [computer name] idea turns out to be a disaster and they go under, [XYZ Computers]'s lawyers trot down to the local US Bankruptcy Court and file. The court appoints a receiver to reorganize the firm or liquidate it.

Your monthly payments still go to [XYZ Computers] but get put in a checking account under the control of the court-appointed receiver. The receiver is responsible for paying the remaining employees, paying [XYZ Computers] creditors, etc. In the case of [bank name], replace "[XYZ Computers]" in the above example with "[bank name]" and replace the court-appointed receiver with the FDIC.

Since we are assuming [bank name] failed, the FDIC comes in one evening and padlocks the doors. Next morning, depositors can get their money, but shortfalls are covered by the FDIC reserves. The FDIC collects [bank name]'s outstanding loans and tries to pay off creditors and replenish any funds advanced by the FDIC. Then the FDIC tries to sell off the carcass. But the loans never go away.

Ultimately, the good loans are purchased by whoever buys [bank name]'s remains. Often, the FDIC retains the bad loans (i.e., loans in default--not your loan, because you said you were still paying it. The FDIC will try to collect on any loan that is in arrears.)

See the history of the S&L bailout. The FDIC (and the Resolution Trust Corp., set up specifically to liquidate S&Ls) know how to shut down and liquidate failing institutions.

> or can a bank even fail these days due to cash withdrawals?
> Are the Y2K doom predictors operating on a 1920's banking
> model?

A lot of them are projecting the Depression scenario into the '90's. Not to say it can't happen, but... Cash w/ds cause a liquidity crunch. Member banks could call the Fed and borrow money from us. Banks can call commercial loans and other loans with a demand feature. They can also sell T-bills and other money-market instruments to raise "cash."

But, again, these sales don't produce coin and currency. They just produce credits to the bank's account at the Fed or a correspondent bank or wherever. The bank needs coin and currency to satisfy the depositors at the door. That is why the Treasury is printing lots of additional currency in anticipation of increased public demand for cash.

Now, this is ignoring the true doomsters who forecast Y2K problems will cause the economy to shut down for whatever reason--no electric power, etc. If GM shuts down and doesn't pay its bills, not to mention all the employees not getting paid, yeah, banks will fail. But I think the more likely scenario is panic cash-hoarding resulting in a bank holiday for several days or a couple of weeks. Fear of the problem leading to the problem feared.

The FDIC charges banks for deposit insurance based on deposits covered. FDIC reserves got slaughtered in the bank/S&L crisis in the '80's. They have been rebuilt. There is no pressing drain on those reserves now. Heard of any bank failures recently? Furthermore, the FDIC is backed by "the full faith and credit of the U.S. Government." In case of bank failures, the Treasury would give the FDIC money to pay off depositors. And the Treasury gets the money from--guess who.

Hey, it is great to be prepared. But I think some of the Y2K folks are a little paranoid about things and are projecting the Apocalypse when the real risk is nowhere so severe as that. I plan to hold some more cash, but am sure not converting everything I have to green bits of paper. It is damned inconvenient for one, and then I have to worry about safeguarding the stuff as well.

I truly expect there to be some disruptions to our daily routine due to Y2K, and maybe even the banks will be closed for a bit (or is this wishful thinking?) But this isn't likely to cause the collapse of the banking system. Even the Depression didn't do that.

--- end quoted conversation ----------


-- Arnie Rimmer (, November 23, 1998


"Even the Depression didn't do that."

Does this person take into account the worldwide implications of failing economies and business outside our country when making an analysis? They brought up the auto industry. Have they contemplated what might happen if not only GM but every other auto manufacturer worldwide simply slows down their production?

No one can predict exactly what will occur and even Alan Greenspan himself has stated this fact.

The banking system doesn't have to collapse in order for you to go hungry. What if the company you work for closes or lays you off? Maybe you'll find a job quickly in the chaos but maybe not... lots of reasons to keep preparing.


-- Michael Taylor (, November 23, 1998.

Arnie, great post thanks for your time.

I find it bewildering!

Who to believe?

For example: STOCK MARKET WILL CRASH!!! Right, Its at all time highs as of today, and todays scan across my favorite links is showing a "fair weather" thumbs up.

With all the "feel good" stuff out there, I sometimes wonder if I suffer from a form of paranoia. (well, not really but you know what i mean:-)



existential paranoia/...........When you think someone(something)

is out to get you...............AND THEY REALLY ARE!!!!!!!!!!!!!!


-- WAAHOO (, November 24, 1998.

Moderation questions? read the FAQ