Here’s the problem. In 1990 many banks went insolvent presumably because the value of their assets (e.g. loan IOUs), were suddenly diminished so much that these banks failed to meet their Fractional Reserve Requirements and thus were put out of business by the Federal Reserve. The FDIC came in and partially took care of the depositors that held funds at these failed banks.
In 2010 again many banks went insolvent because the value of their assets (e.g. loan IOUs) went bad. This included those loans that were bundled and then “monetized” by selling off the IOUs to others around the world. This time the insolvent banks were allowed to borrow from the Federal Reserve. As long as they paid back the loans they got from the Fed, they could stay in business.
Was this a fundamental change from “Fractional Reserve Banking” of the last century to “Stress Test Banking” (e.g. meeting certain “reserve, capital and liquidity requirements”) that we have now (e.g. Cullen’s MR)?
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