Since the inception of the Federal Reserve System, our fractional reserve banking system has steadily degraded reserve ratio requirements until they finally just did away with them altogether and ushered in our brave new era of zero reserve banking. Banks are not tasked with maintaining any specific thresholds of reserves and now manage liquidity by buying and selling debt instruments as necessary.
It works great - until it doesn't. As the Federal Reserve embarked on QE and lowered interest rates towards zero several years ago, banks loaded up their balance sheets with low interest bearing debt. When the Fed reversed course with QT and raising rates to combat inflation, many banks were caught with balance sheets full of upside down investments. Unable to keep pace with the yields offered by Money Market Funds (MMFs), they are facing deposit redemptions as money is pulled from the banks to chase yields in MMFs. The situation is leading to fears of a systemic crisis as half of America's banks are reportedly already insolvent.
Consider the saga of Custodia Bank:
Custodia Bank applied for both membership in the Federal Reserve System and for a Fed Master Account. Custodia Bank planned to use a full reserve banking model to satisfy risk requirements of Wyoming where it got it's charter, except it planned to serve the crypto industry. So, with America's War on Crypto (and Operation Choke Point 2.0) in full swing, the Fed denied Custodia's applications with the justification that:
Great job fellas! You certainly understand risk management controls and liquidity risk management practices and know a solid bank when you see one. The last decade is replete with examples (see graph above).
Now consider the saga of the Narrow Bank:
The issue that led to the current wave of regional bank failures was deposit draw downs and then, in SVB's case, a run on deposits from customers holding large, uninsured deposits - the very customers that the Narrow Bank sought (seeks) to service.
Great job fellas! Another triumph of risk management for masses.
It works great - until it doesn't. As the Federal Reserve embarked on QE and lowered interest rates towards zero several years ago, banks loaded up their balance sheets with low interest bearing debt. When the Fed reversed course with QT and raising rates to combat inflation, many banks were caught with balance sheets full of upside down investments. Unable to keep pace with the yields offered by Money Market Funds (MMFs), they are facing deposit redemptions as money is pulled from the banks to chase yields in MMFs. The situation is leading to fears of a systemic crisis as half of America's banks are reportedly already insolvent.
The Fed Knows Best? They Certainly Know Irony
Consider the saga of Custodia Bank:
Custodia Bank applied for both membership in the Federal Reserve System and for a Fed Master Account. Custodia Bank planned to use a full reserve banking model to satisfy risk requirements of Wyoming where it got it's charter, except it planned to serve the crypto industry. So, with America's War on Crypto (and Operation Choke Point 2.0) in full swing, the Fed denied Custodia's applications with the justification that:
Great job fellas! You certainly understand risk management controls and liquidity risk management practices and know a solid bank when you see one. The last decade is replete with examples (see graph above).
Narrow Thinking
Now consider the saga of the Narrow Bank:
The issue that led to the current wave of regional bank failures was deposit draw downs and then, in SVB's case, a run on deposits from customers holding large, uninsured deposits - the very customers that the Narrow Bank sought (seeks) to service.
Great job fellas! Another triumph of risk management for masses.
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Mr. Kaloudis 
