Cash Crunch: The Collapse of Trust in Today's Banking Crisis

finance, society

The Erosion of Confidence in Financial Institutions

In the wake of the 2008 financial crisis, the world was reminded of the fragility of the banking system. Despite the implementation of stricter regulations and the efforts of policymakers to stabilize the global economy, the risk of another financial meltdown looms large.

In recent years, rumors have swirled that some of the world's largest banks are teetering on the brink of collapse, prompting fears of a catastrophic economic collapse. With concerns mounting over the health of the banking industry, many are wondering whether the system as we know it is fundamentally broken.

While it is true that the fractional reserve system allows banks to lend out more money than they actually have in reserves, banks are required by regulatory bodies to maintain a minimum level of reserves. But do they do that? Additionally, banks have various ways of generating income, such as through fees, interest on loans and investments, which allows them to remain profitable even with the fractional reserve system in place.

What is Fractional Reserve System?

The fractional reserve system is a fundamental concept in modern banking, which allows banks to create money by lending out more than what they have in reserves. This system has been in place for centuries and has played a crucial role in the growth of the modern economy. However, it also presents certain risks and challenges, particularly in terms of financial stability and inflation.

Although, Quantitative easing (QE) or the artificial printing of money how is usually called, it only allows banks or central banks to print money, as it considered a monetary policy tool used by central banks to stimulate the economy and encourage lending by injecting large amounts of money into the financial system.

World Debt vs World Cash

As of 2020, the amount of world cash in circulation was estimated to be around $5 trillion USD. This includes physical currency such as banknotes and coins that are in circulation around the world. Although, the actual amount of cash in circulation can be difficult to measure accurately, as much of it is held outside of formal banking systems and is not accounted for in official statistics. This estimate provides a rough approximation of the amount of physical currency that is available for use in global economies.

However when compared with the total amount of world debt which was approximately $277 trillion USD as 2020, the gap is just gigantic. This includes debt held by governments, corporations and households around the world. Basically, the entire society is built on debt. The Covid19 pandemic and its economic impact have contributed indeed to increased the level of debt in many countries, as governments have borrowed more to fund relief efforts and stimulus packages.

Although these days, the money are just numbers on a screen. Therefore, the value of money is no longer represented by physical objects that can be held and exchanged directly, but rather by electronic records of transactions and balances that are displayed on screens.

Being Casual About The Security of Deposits in Banking 

Deposit guarantees are a form of protection for bank customers that ensure that their deposits are safe and will be returned to them in the event of a bank failure. Deposit guarantees are typically provided by governments and they serve to reassure consumers that their money is secure even if the bank that holds their deposits encounters financial difficulties.

When banks go broke, the cost of the bank failure is often borne by taxpayers because the government steps in to bail out the failing bank. This is done for a few reasons:

1. Protect depositors: When a bank fails, the depositors who have money in that bank could lose all of their savings. This can have severe consequences for individuals and for the economy as a whole. By bailing out the bank, the government ensures that depositors will receive their money back.

2. Prevent a wider financial crisis: If a bank fails and is not bailed out, it can create a ripple effect that can destabilise the entire financial system. Depositors in other banks may become worried about the safety of their own deposits and this can lead to a run on other banks. By bailing out the failing bank, the government can prevent this from happening.

3. Protect the economy: Banks play a critical role in the economy by providing loans and other financial services. If a bank fails, it can have a negative impact on the overall economy. By bailing out the bank, the government can prevent this negative impact from occurring.

The taxpayers have had to bear the cost of a bank failure for decades, as deposit guarantees and government bailouts was always considered necessary to protect the stability of the financial system and the broader economy.

The Bottom Line 

The fall down of trust in today's banking crisis has led to a liquidity crisis that has affected individuals and businesses worldwide. While there are no easy solutions to restore confidence in the banking system, it is clear that transparency, accountability and responsible regulation are essential for rebuilding trust and ensuring financial stability in the future.

As we navigate these challenging times, it is crucial to remain vigilant and informed about the risks and opportunities of the evolving financial landscape. Only through collaboration, innovation and a shared commitment to ethical and sustainable practices can we overcome this economic squeeze and build a more resilient and inclusive global economy.

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