Canada’s Private Banks have no Reserve Requirements.

In banking, there is a common term called “reserve ratios” or “reserve requirements”.

For simplification, all this means is that government imposed regulations on private banks says that they are required to keep a certain amount of “money” (it isn’t really money…they call it “capital instruments” – something that is “as good as money”) back in the vault for every dollar they loan out. For example, if the reserve ratio is 10%, it means that the bank would keep 10 cents in the vault for every dollar they loan out.

We have been conditioned via government education not to think of this at all or at least rationalize this as a good idea. There can be many examples cited in history where depositor’s confidence in their bank was shaken, and they all lined up all at the same time to withdraw their money – a run on the bank. These were ugly scenes as you can imagine. Panicking people screaming, yelling, and fighting with bank staff – and each other – to be in line first before the bank ran out of cash.

To placate the populace, government:

• Mandated regulatory compliance on bank operations.
• Enacted a Central Bank as a lender of the last resort – or a donor of the first resort depending if a bailout is required.
• Setup a depositor’s insurance fund that would refund deposits in the event of the bank becoming insolvent. This of course would ultimately be paid by the taxpayer in the event a bank defaulted – essentially a subsidy to the bank owners, but hey, who cares?

In Canada, the reserve ratio was phased out in the Bank of Canada Act in 1992. Today, if you look at the Act, you will see the following stanza:

457. [Repealed, 1999, c. 31, s. 14]

It took some digging to find out what was contained in that section, but here it is:

457. (1) Subject to this section, a bank that was in existence immediately prior to the day this section comes into force shall maintain a primary reserve in the form of

(a) coins with a face value of two dollars or less that are current under the Currency Act;
(b) Bank of Canada notes; or
(c) deposits in Canadian currency with the Bank of Canada.

(2) Subject to subsection (4), the primary reserve referred to in subsection (1) shall not be less on average during any prescribed period than an amount equal to the average of the monthly levels of required primary reserves calculated for the month in which this section comes into force and for the preceding 11 months, as determined under section 208 of the Bank Act, being chapter B-1 of the Revised Statutes of Canada, 1985.

(3) Where a bank to which this section applies has been, on the day this section comes into force, in existence for less than 12 months, the primary reserve referred to in subsection (1) shall not be less on average during any prescribed period than an amount equal to the average of the monthly levels of required primary reserves calculated for the month in which this section comes into force and for the preceding months it has been in existence, as determined under section 208 of the Bank Act, being chapter B-1 of the Revised Statutes of Canada, 1985.

(4) On the first day of the first month following the month this section comes into force, the primary reserve referred to in subsection (2) shall be reduced by 3 per cent, and thereafter on the first day of the first month of each of the next three succeeding six month periods, the primary reserve as modified by this subsection shall be reduced by 3 per cent, and on the first day of the twenty-fifth month following the month in which this section comes into force, the primary reserve referred to in subsection (1) shall be nil.

…

What I cannot determine is when the above was actually PASSED into law. All I seem to find is other sites stating it was sometime around the early 1990s. I’ll keep looking. If anyone knows and has proof, drop me a line and I’ll update this post.

Update: It seems that the above text was quietly passed into law in December of 1991, via Bill C-19.  I need to find a reputable source for this.

What it says is that when this act is passed into law, the bank reserve requirement will fall over a 25 month period until the Bank Act of Canada no longer requires the bank to keep ANY reserves.

What i did find was Bill C-84. This bill was sponsored by the Minister of Justice and was described as:

An Act to correct certain anomalies, inconsistencies and errors and to deal with other matters of a non-controversial and uncomplicated nature in the Statutes of Canada and to repeal certain Acts that have ceased to have effect

This a housecleaning bill. Section 457 is one of them. If you have a “time bombed” clause like section 457 and it has expired, why keep it in the Act? In other words, it is a lot nicer saying:

457. [Repealed, 1999, c. 31, s. 14]

than:

457. “We changed this requirement. Banks don’t have to have ANY money in the vault to back their loans. We, the government of Canada, authorize them to mint as much checkbook money out of thin air as the market will bear. We will stay out of the banks business as they must know what they are doing. However, if they screw up, we will make sure the citizen bails them out via inflation and extortion…ooops, we meant taxation. Well, we would do that anyway. Good luck with that!”

This is why if you look at the Bank Act today, you will see no mention of any reserve requirements at all.

Ugh.