Reserve requirements in the U.S. today are around 6-12%. On the surface this may seem like a comfortable range for normal banking operations-and it is! But wait.
In reality actual cash reserves sitting in vaults and spare currency in Federal Reserve holdings is much lower. These numbers are between 1.5-2.75% of total deposit obligations.
Therefore the system relies universal public and depositor confidence and faith they will have access to their savings, as it would take a mere 5% (or less) to deplete all reserve.
When banks fail, the FDIC steps in and cover a failing account for up to $100,000. However, it cannot at any one time bail-out large numbers of banks simultaneously. This is because it only holds approximately 1.5% in total deposit obligations. As a result, the FDIC can realistically insure a very small minority if a serious financial crisis were to emerge ...
There are 103, 000,000 households in the U.S. The average monthly earnings are around $3,000 per head of household. For the sake of argument let's conservative and say that the average worker (139million) will have $1,000 cash on hand (which takes into account the fact that some have none and some have much more) This would be $139 billion.
Let's say that households take out an average of 15% of their bank accounts to be safe. This would be another $50 billion.
Now let's say that 25% of small businesses plan to have two weeks cash to ensure payroll for employees. That's another $31 billion.
Let's say that businesses, out of concern for their investments, withdraw an average of 5% of their deposits (Business deposits total $3.1 trillion). That's another $155 billion.
Now let's add it all up. $139 Billion +$50 Billion, +$31 Billion, +$155 Billion ... A Total of $375 billion in cash will be demanded.
This doesn't sound too bad does it? What if these numbers are doubled? $750 billion. So this begs the question: Is there enough currency to meet this demand?
FACT: Existing bank reserves are $49.4 billion. The Federal reserve has promised to have an extra $200 billion specifically for Y2K. Adding these two figures we have a total of $249 billion that the banks will have available. This would not only drain ALL reserves, but banks would be short -$125 billion!!
There would be no more cash left.
BUT WAIT, IT GETS WORSE. The above are based on very reasonable assumptions and disregards real-life. If such a small amount of withdraws could cause wreak so much havoc, what will be the general public's reaction when the panic begins? At some point in the midst of a crisis, infamously known as a bank run, sentiment will change in a dramatic fashion. As the lines get longer it becomes "Give me it all
please."
Recall the 5% rule: the approximate percentage of depositors required to shut down the financial system if they were to behave in this manner. There have been many recent polls indicating something quite alarming. The percentage polled who intend to withdraw ALL of their cash before 2000 ranges from 16-31%. Those who say "most" is even higher at 30-47%.
From these numbers it can be concluded that there will indeed be a popint only months away when a freeze on the bank accounts takes place. What is as yet unclear is the precise date it will occur, or the manner in which it is executed.
gold-eagle.com
BARRING A MASS PANIC, the Federal Reserve can provide the liquidity banks need. But there aren't enough armored cars to deliver all that cash in the last two weeks of December ... Banks will need to gradually build their stockpiles and swallow the costs of carrying so much unused inventory. For bankers who know they are ready, that could seem a hard cost to justify.
One way around that is to pay customers making large withdrawals with cashier's checks or wire transfers, and the Colorado Bankers Association is researching the legality of doing just that.
Most people assume they have the right to receive currency on demand. But banks have a legal right to offer other forms of payment, said Don Childears, CBA president. . . .
amcity.com
DENVER BUSINESS JOURNAL - March 8, 1999
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CONTINGENCY PLANNING - TO MEET JUST ONE COUNTY PAYROLL
Montgomery County [Adjacent to Washington D.C.] officials, despite their work to debug their own networks, are taking precautions in case others are not as farsighted. In the days before New Year's Eve 1999, Romer will instruct several banks to stash $14 million in cash in their vaults. That's the equivalent of one county pay period, just in case direct deposit fails.
Message 7069598
How much cash are government officials and banks telling us, as individuals, to have on hand? $100? $1,000? Enough to get thru a BAD winter snowstorm?
How much is avg individual paycheck for Montgomery county employees??? $100? $1000?
Wonder if Montgomery County will also have some cash on-hand to pay key suppliers?
Wonder if other counties, states and/or businesses are gonna do the same thing?
Kinda cuts in to those limited cash reserves, doesn't it?
Cheryl
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