Yes, Virginia, There Are No Reserve Requirements (PART 2/2)

Includes: C, IEF, UDN, UUP
by: Jake Towne

Since the 1990s, the FED has change accounting rules so even the loose ~10% fractional reserve requirement could be thwarted. We live in an era of paper tickets.

In Part 1, Fractional Reserve Banking in Pictures, we saw how the banking system creates fraudulent money by creating new money on top of old. The reserve requirement limit used in the example, 10%, is the figure usually given, which means that from a $10 deposit the banking system could generate $90 of new money. Also, the FED uses Open Market Operations to create new money by writing a check upon itself.

This article will demonstrate that reserve requirements are effectively not in existence and easily avoided by accounting tricks in the U.S. banking system. In my view, the evidence is unrefutable as the sources are from the FED and documentation from Citigroup. Although I have tried my best to keep the following simple and source my data, please feel free to comment or question and I will do my best to reply.

The first chart is from the FED's latest Purposes and Functions from 2005 on page 51 of 146.


As can be seen, "net transaction accounts" have a 10% reserve requirement when over $45 million at a depository institution. Net transaction accounts are checking accounts, demand deposit accounts, NOW (negotiable order of withdrawal) accounts, or credit union share draft accounts (p. 135/146)

"Nonpersonal time deposits" are defined (p 129/146) as a "time deposit held by a depositor other than an individual" such as certificates of deposits, or CDs. These have no reserve requirement.

fedNow what about savings accounts and certificates of deposits? These are termed "nontransaction accounts" by the FED since they do not meet the requirements of a transaction account (CFR 204.2). See our next chart, taken from page 21/21 in this 1993 article from the Federal Reserve Board's Division of Monetary Affairs. Personal savings accounts, CDs, or money market accounts are not reservable liabilities since December 1990 as stated directly by the FED in 1993 and indirectly by their non-inclusion here. So, there are no reserve requirements for personal savings accounts and CDs.

The above leave us only with checking/NOW (or "net transaction") accounts. Here's the text for the "two sub-accounts" trick done for "accounting purposes" by Citibank (NYSE:C):

"For accounting purposes, all Citibank consumer checking accounts (Regular Checking, Citigold Interest Checking, Interest Checking and Basic Banking Account) consist of two sub-accounts; a transaction sub-account to which all financial transactions are posted; and a holding sub-account into which available balances above a pre-set level are transferred daily. Funds will be transferred to your transaction sub-account to meet your transactional needs. For Regular Checking and Basic Banking Account, both sub-accounts are non-interest bearing. For Citigold Interest Checking and Interest Checking, both sub-accounts pay the same interest rate. Transfers can occur on any business day. Transfers to the holding sub-account will be made whenever available balances in the transaction sub-account exceed a preset level. Transfers from the holding subaccount to the transaction sub-account will be made whenever transaction sub-account balances fall below a predetermined level. Because banking regulations limit the number of transfers between these types of subaccounts, all balances in the holding sub-account will be transferred to the transaction sub-account in the sixth transfer in any calendar month. Both sub-accounts are treated as a single account for purposes of the client’s deposits and withdrawals, access and information, tax reporting, fees, etc." (Citibank Client Manual p. 19-20/33)

First, note that the account holders have no idea these sub-accounts exist unless they read this fine print. I encourage you to check your checking account's fine print – all of the major banks I have checked use "two sub-accounts," and several nearby local banks in my area have it too.

Second, note that the holding sub-accounts may fluctuate daily, and there are no rules whatsoever limiting how much of the currency can be diverted to this holding sub-account.

Obviously, the reason for the "two sub-accounts" accounting trick, more politely termed "Deposit Reclassification" by the banking industry (see page 9-10/31 of this agreement from Camden National Bank), is to have the holding sub-account deemed a nontransaction account and no longer subject to reserve requirements. In Eric deCarbonnel's article "Deposit Reclassification Used To Eliminate All Reserve Requirements," he refers to additional sources including this easy-to-follow piece from Romney & Associates where the author outlines the benefits and profits from deposit reclassification – by changing reserve requirements at their whims, banks can loan out even more – which is naïve insanity of course in the event of a bank run.

Speaking of bank runs, let's take a look at the FED monetary base, reserves, and vault cash. Per the latest H3 report from the FED, we have the below data (in millions of USD). Note the massive swings in nonborrowed reserves and the monetary base which took place roughly a year ago.


In the next chart, I took the reported deposits of FDIC depository institutions – which is an approximation I have made of the U.S. banking system from June 30, 2008 (p. 16/21) and the latest March 31, 2009 (p. 18/27) report - and listed the July 2008 and July 2009 results from the H3 report. Provided my calculation of dividing the Total Reserves by the FDIC-reported Domestic Deposits is reasonable (I haven't been able to find suitable FED numbers, hence my usage of FDIC data), the "Towne reserve ratio" was just a shocking 0.6% in July 2008.While the current "Towne reserve ratio" is 10.6% now, this is likely due to the monetary base change below. While I will be the first to note these percentages are just rough numbers, isn't it funny how the math is now close to 10%?

towne reserve

Note that in July 2008, the banking system's vault cash exceeded both required and total reserves. [Vault cash is the physical banknotes that banks keep on hand to meet withdrawals; the vast majority of dollars exists in the form of electrons, and only a tiny sliver is metal coinage.] Now, in July 2009, the required reserves and vault cash have been relatively unchanged.

Over the same period, the monetary base has almost doubled from $847 billion to $1,681 billion while reserves grew by about the same amount, from a scant $45 billion to $803 billion. Where did this money come from? It is likely just FED "liquidity" or newly created currency. We would need to audit the FED to really be sure, but the timing and amount coincides with the Banker Bailout of October 2008. At any rate, the intention of this money is likely just to paper over the collapse of the banking system last year.


In plain english, the U.S. banking system is using a sneaky accounting trick listed the fine print of checking account agreements to escape the gravity pull of reserve requirements. The system likely already crashed last year, but the FED pumped in liquidity last year at the same time as the Banker Bailout to avoid the collapse of this Ponzi scheme.

This brings me to an interesting conclusion – at this point in history, our monetary system is really no more than paper ticket printing and excited electrons. [Although technically speaking, dollars are linen with mercury, arsenic, cyanide, titanium dioxide, formaldehyde, lithium, valium, zinc imbedded as I wrote here "The Federal Reserve - A Good Company to Work For?".]

Although our central bank, the FED, can technically NEVER go bankrupt since it has the power to create as many paper tickets as needed, risks over the long-term include psychological events like hyperinflation where the demand to store money goes to zero, and the purchasing power of the currency approaches zero as well. However, the true responsibility lies with U.S. Congress, which "delegated" its control over the currency to the FED in 1913.

As F.A. Hayek wrote in The Road to Serfdom, delegated autonomy from the legislative body of a socialist state is usually done to escape blame and responsibility for the inevitable mistakes of central planning. Understand that the next time you see your Congressman or -woman, unless he happens to be Dr. Ron Paul, they are responsible for quite literally stealing purchasing power from your pocket as I related in further detail here "Unlocking the Money Matrix - The Real Interest Rate (PART 12/15)".

The solution? The money power must be returned to We the People. The FED must be abolished, by populating the U.S. House with representatives who will end the FED. I've outlined the steps I recommend in slides 26-47 of this presentation, but this certainly requires a national debate.

One last bit of math. $49 Billion in vault cash divided by 307 million Americans works out to a whopping $160 per person. Maybe Bernanke over at the FED should fire up the printing presses!

Note: Thanks to Eric deCarbonnel whose article "US Banks Operating Without Reserve Requirements" clued me in to the above facts. Interested readers are also recommended to read my last update on the banking system from April "Off a Cliff with No Airbags" as the situation has only worsened, and the conclusion section is still quite relevant. Please ask any questions below and I will do my best to answer them clearly.