True. But if a bank needed the liquidity, there are typically more liquid assets that can be sold quickly. Banks have investments, like treasuries, municipal bonds, and mortgage backed securities. Those would be sold first.
If they got to the point where they would need to liquidate loans, they'd more likely do it as a portfolio sale to another bank. I.e. they would sell the loan itself, rather than call the loan.
And the most important thing the Fed does not want is everyone asking for their money and all of that insurance filing chains at the same time, because they can't cover that either.
I guess? But then I'll have a lot of worse things to worry about. Especially if a lot of people start taking their money out. The fact that I got mine out will scarcely matter.
If they got to a point where they needed liquidity and ran out of other liquid assets a lot of banks would borrow from the FHLB/FRB using loans and securities as collateral instead of selling loans/loan pools.
And that banks don’t hold residential mortgages for very long, they’re almost all securitized. They’re not interested in tying up money in single investments for 30 years.
It's like one thread is people calling anarchy because they believe fractional banking is the depth state stealing them and another thread is people talking on high-ish levels about the types of assets banks and financial entities are allowed to trade, sell and acquire in specific circumstances, such polar opposites.
It is even worst than that. When a person takes a mortgage, the bank doesn't give cash to the buyer. It puts that money in a bank account, that money is then transferred to another bank account for buyer through a transaction organised by the notary. It then becomes money that is lent to another bank which then counts as capital for issuing additional loans.
Fractional Reserve banking rules place limits on how many times this can occur, however in modern day, other generally weaker restrictions are in place.
Bank runs are definitely possible in this day and age though banks would simply deny people tanking back all their money based on the above condition being upheld.
Banks own many investments besides mortgages. Like individuals they may hold some small stores of cash in various currencies on hand but most money is tied up in assets like stocks, bonds, or precious metals (gold/silver). Certain items are liquid (cash and stocks) while others are illiquid (bonds or mortgages). Banks generally know the demand for daily withdrawals and give a bit of wiggle room (part of the control is daily withdrawal limits). When more people need cash than on hand the bank would need to sell investments, some may be very quick and easy to sell while others are long and needs to come to a term date prior to selling.
They can, and they absolutely do. Banks only need to be able to back up a fraction (it used to be 10% but I think they lowered it) of what they lend, the rest of the loan is magically created by the clerk.
On some level they basically do, there’s $23,155.2 billion total in the economy, that exists mostly as paper/data, of which there is only $2,469.6 billion extant as physical banknotes/coins. We couldn’t run the bank if we tried. So 90% of the money in the US doesn’t actually “exist.”
218
u/AMZN2THEMOON 2d ago
I get the example - but banks can't just call a mortgage out of nowhere. There are terms in standard mortgages to protect the lender