Let us take the water tank analogy: I am a bank owner, so my and the depositors’ money is pooled together in a tank. The money is then lent out, nothing will remain in the tank. A small part of the money is deposited with (i.e. lent to) the central bank and is known as the bank reserve. When money flows back to the tank I am the last in line to receive my share, so I would lose all my money before the depositors lose any of their money. In bad years the equity goes down and in good years part of the profit is retained (lent back) to increase the equity base.

Reserves were important when currency was linked to gold and bank runs were more common, now they play a minor role. Banks that have deposit insurance pay a yearly premium.

Great article, keep up the good work.

When this is all over let’s turn the roulette tables in to matchsticks. I bet 10 matchsticks that this crisis will be a distant memory in 20 years time. That will be the time when convention dictates that I retire. LOL

The big imponderable is whether Credit Default Swaps are worth the paper they’re written on. If a ‘default’ occurs and creditors claim their ‘insurance’ payout the issuers are in trouble if they haven’t set aside funds to pay (and there was no legal obligation to do so) – see: AIG. But it seems that many issuers of CDS are also holders. The fact that the ISDA (controlled by the big banks) has been reluctant to trigger payouts suggests that CDS were really no more than a fig-leaf to offer a false sense of security – enabling higher leverage.

Meanwhile, central banks can continue to restore private banks balance sheets with a bottomless pit of cheap finance, while austerity is imposed on the masses – when as much has been extracted from the Greeks as they can get away with, the caravan moves on to Spain, Portugal, Italy … France?

Yes. He’s careful to say none of the shenanigans were ‘illegal’ (probably advised on that) – which just highlights what you can get away with without breaking the law.

Apparently, shafting your client by selling him products you know are dodgy/overpriced, or which are entirely inappropriate to their needs is not ‘fraud’ in the financial sector.

The whole emphasis on modern finance is to create products so impenetrable that the client will never undestand them – drawing economic rent from asymmetric information – the exact OPPOSITE of how ‘free markets’ are supposed to operate (Michael Hudson is very good on this in the latest ‘Keiser Report’).

A lot of small traders taken to task on Watchdog must realise they were in the wrong profession!

But anyone whose read Satyajit Das’s ‘Traders, Guns and Money’, McLean/Nocera’s ‘All the Devils Are There’, or Matt Taibbi’s dispatches from the frontline of the financial war knew that already.

On a very similar theme http://londonbanker.blogspot.com/2012/03/your-bank-fiduciary-or-predator.html