I went to make a few deposits today and I overheard two bank reps speaking stating that there is (or perhaps already exists) a plan to partially cash checks and give the remainder of the funds to a customer back on a debit card.  I didn’t hear the full details but I’m guessing if you walk in with a check for $2,000 you might get $500 in cash and $1,500 on a debit card.

I couldn’t believe my ears!   Is this how the Federal Reserve and banks are going to solve their solvency issue?    It makes perfect sense because there are many things you probably don’t know about banking.

First there is fractional reserve lending by which a bank who receives a savings deposit of say $1,000 can turn around and lend out $9,000 and charge interest to make a handsome profit.   Of course the deal got a whole lot sweeter when the Fed let banks use “sweeps” to increase the stated reserves of each bank.    What this means is that if you deposit $1,000 into your checking account, the bank isn’t suppose to use that money and count it toward their reserves because a customer may spend that money at any point in time.   Through the miracle of “sweeps” though, the Fed allows banks to “sweep” the $1,000 in your checking account into a “savings” account and count that as part of their reserves.

So now, instead of having $1,000 to base their deposit reserves on, the bank has $2,000 of  “stated” reserves and basis their fractional lending on $2,000 to lend out $18,000.     But what happens when customers no longer have jobs and no longer deposit money and actually write checks and spend their money?   The whole thing unravels rather quickly and the new trick of the trade seems to be to partially cash a check you get and issue you the remainder of the balance on a debit card.

Guess what the bank gets to do with the debit card funds?   You guessed it, they get to lend out that money, charge interest, and make a nice profit with your money.   What a world….