It is my understanding that, while any entity can create dollar-denominated assets (stocks and bonds) and sell them on the open market, only banking institutions in the United States can engage in fractional reserve banking and thus truly increase the supply in US Dollar funds.

These funds are liabilities of the banking system as a whole to deposit holders and I am certain must be regulated in some way. What does an institution need to do to have this powerful ability to create new USD funds? Is it to be part of the Federal Reserve System? Is it to join the FDIC -- some state banks are outside the Federal Reserve System? Is it to be subject to other regulations and requirements to take deposits at all?

  • 1
    $\begingroup$ What makes you think that an institution outside the US couldn't engage in fractional reserve banking? If a bank in Mogadishu tried to do this, what do imagine would happen? $\endgroup$ – Dan Mar 25 '18 at 17:13
  • $\begingroup$ I'm speaking of fractional reserve banking in USD, but regardless, this does not answer the question. Perhaps you are hinting towards trust issues. If so, I am looking for how trust is formalized in practice, hence the question. $\endgroup$ – Nimrod Mar 25 '18 at 18:23
  • 1
    $\begingroup$ Sorry, I should have been clearer: I specifically meant in USD, which is used as a parallel currency in a large number of countries, whose banking institutions often denominate accounts in USD. It wasn't intended as an answer, but to clarify your question. $\endgroup$ – Dan Mar 25 '18 at 18:45
  • $\begingroup$ That's a good point, thank you for the additional insight. $\endgroup$ – Nimrod Mar 25 '18 at 18:55
  • $\begingroup$ It needs a banking license. In the United States, that’s done at the state level. So there’s 50 different answers... $\endgroup$ – Brian Romanchuk Mar 25 '18 at 21:24

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.