Re: I want to set up my own bank

RFMontraz · Post by **RFMontraz** » Thu Aug 12, 2004 5:07 pm

For a start I'd like to know how the transaction is settled. Where does Mr John Doe send his money? I mean as he sends a bank wire (and not a bag filled with cash), how do I receive it? Is there some sort of central clearer? How do I get the money in the vault?

The sad part is that I'm not taking the piss here...

FDAXHunter · Post by **FDAXHunter** » Thu Aug 12, 2004 5:11 pm

Reserves are held at the corresponding central bank (say, the Federal Reserve Banks in the US or the NCBs in Europe).

In Europe, the current reserve ratio is 2% applied to an institutions reserve base. The resever base represents the institution's deposits, debt securities and currency liabilities (all these from non-bank entities). Very small institutions don't have to hold a minium reserve. This reserve has has to be held in the current account of the institutions corresponding NCB.

In the US, these ratios are different and staggered by amount, going from 0% (for small institutions) to 10% for reserve bases of greater than 45.4 Million USD.

I should probably stress that Eurocurrency liabilities have a reserve requirement... of... tadadadada: 0%. Hence it's spectacular growth.

RFMontraz · Post by **RFMontraz** » Thu Aug 12, 2004 5:18 pm

So once I got a bank licence for my Lemonade Stand Bank, my bank will open an account at the Central Bank of the country I chose (say Wildoland). That's where the money comes to and goes from?

FDAXHunter · Post by **FDAXHunter** » Thu Aug 12, 2004 5:26 pm

yes, essentially.

You take in money from your client (me). You bank a fraction of that at the Central bank (if you are small enough (say only a couple of million, you will be exempt anyway). The rest (>90%) is available for you to lend on to another client at your discretion.

kr · Post by kr » Thu Aug 12, 2004 5:28 pm

arroway - are you saying that when the money comes in, there is no matching liability? I mean, the customer didn't just give it away. In a more traditional context, you'd have a liab for 'services due', or something like that, right?

see fdax, even after everybody gave it a crap review, I got a copy of "creature from jekyll" on the cheap, made me at least a little bit curious about how to pull a banking scam

ok, that last part also inspired a little bit as I am the proud owner of "Thomas Crown Affair" - the Steve McQueen original, not the makeover

but yeah, wire is a good example, re: interbank settlement, there must be a massive computer out there that can be hacked, right?

NeroTulip · Post by **NeroTulip** » Thu Aug 12, 2004 5:31 pm

but yeah, wire is a good example, re: interbank settlement, there must be a massive computer out there that can be hacked, right?

SWIFT ?

Arroway · Post by **Arroway** » Thu Aug 12, 2004 6:34 pm

Sorry if my post was not clear, I don't know how to draw "T-accounts" on here!

Deposit comes in:

Debit Cash

Credit Deposits (there may be a more specific name, but this is your liability).

Send reserve req to reserve bank:

Debit A/R Reserve Bank (again there may be a more specific name for this account)

Credit Cash

So, now you have, let's say 90% of the original deposit in cash in your vault. You lend it out:

Debit Loans Receivable

Credit Cash

Customer withdraws his money:

Debit Deposits

Credit Cash

So the liability account is called "Deposits" or something along those lines. It might be "Demand Deposits" "Checking Deposits" "CD deposits" etc, with each of those accounts having a subaccount for each depositor.

So yes, as soon as the money is received you (the bank) have a liability for the whole amount.

kr · Post by kr » Thu Aug 12, 2004 9:37 pm

ok, perfect... deposit leverage = demand deposit liabs / plain old cashola

opmtrader · Post by **opmtrader** » Thu Aug 12, 2004 10:09 pm

So why don't I just open up a bank, keep 30% cash on hand and give the rest to Opmtrader's Hedge Fund LLC? Never get too exposed and keep all the trading profits for myself. This sure beats knocking on investors doors and keeping a lousy 20% of the profits. That and you'll never have anyone calling you up every day asking you about your market outlook. Hmmm don't know about the ethics though. Probably not too cool.

FDAXHunter · Post by **FDAXHunter** » Thu Aug 12, 2004 10:26 pm

I'm sure it has been tried. Problem is: If your hedge fund blows out, what do you tell your depositors? Next thing you know is you have federal agents banging on your door for embezzlement/fraud/financial terrorism/smuggling/flying pirate colors/other

There are "rules" in place to prevent this sort of thing from happening (how well they work you got to witness in the big S&L blowup of the 80s Smiley ). Either way, if you are a big enough fish, the feds will slap you on the wrists... if you're not big enough, you are going directly to jail.