If you thought 2008 was bad, just wait..
Historically, banks are required to keep 10% of their loaned-out capital in reserves. However, the Fed just took an extraordinary step of reducing that to 0%.
Banks no longer to keep any assets in reserve. This will turn a house of cards into a gargantuan palace of cards.
In an unprecedented and historic move, the Federal Reserve has lowered its benchmark lending rate to zero.
Yes, ZERO. And the central bank will embark upon a new quantitative easing program designed to stimulate the US economy which has proven susceptible to Covid 19 pressures. The Fed;s asset purchases will consist of U.S. Treasuries and mortgage-backed securities beginning Monday. The majority of purchases will be Treasury securities.
Also, the Fed slashed the rate of emergency lending at the discount window for banks by 125 bps to 0.25%, and lengthened the term of loans to 90 days.
Fed Fund target rate range is now 0% to 0.25%.
According to CNBC, the Fed also cut reserve requirement ratios for thousands of banks to zero. In addition, in a global coordinated move by centrals banks, the Fed said the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank took action to enhance dollar liquidity around the world through existing dollar swap arrangements.
As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.
The following content explains the Board’s authority to impose reserve requirements and how reserve requirements were administered prior to the change in reserve requirement ratios to zero.
The Federal Reserve Act authorizes the Board to establish reserve requirements within specified ranges for purposes of implementing monetary policy on certain types of deposits and other liabilities of depository institutions.
The dollar amount of a depository institution’s reserve requirement is determined by applying the reserve requirement ratios specified in the Board’s Regulation D (Reserve Requirements of Depository Institutions, 12 CFR Part 204) to an institution’s reservable liabilities (see table of reserve requirements). The Federal Reserve Act authorizes the Board to impose reserve requirements on transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities.
Prior to the change effective March 26, 2020, reserve requirement ratios on net transactions accounts differed based on the amount of net transactions accounts at the depository institution. A certain amount of net transaction accounts, known as the “reserve requirement exemption amount,” was subject to a reserve requirement ratio of zero percent. Net transaction account balances above the reserve requirement exemption amount and up to a specified amount, known as the “low reserve tranche,” were subject to a reserve requirement ratio of 3 percent. Net transaction account balances above the low reserve tranche were subject to a reserve requirement ratio of 10 percent. The reserve requirement exemption amount and the low reserve tranche are indexed each year pursuant to formulas specified in the Federal Reserve Act (see table of low reserve tranche amounts and exemption amounts since 1982).
For more history on the changes in reserve requirement ratios and the indexation of the exemption and low reserve tranche, see the annual review table. Additional details on reserve requirements can be found in the Reserve Maintenance Manual and in the article (119 KB PDF) in the Federal Reserve Bulletin, the appendix of which has tables of historical reserve ratios.”
From Federal Reserve website.
Based on very rough calculations, this will free up over $1T in deposits to loan, a larger impact than the $700B QE. Source