One of the most important things about a bank is its ability to pay its depositors. At times, this can mean that the bank must be able to convert some assets to cash the depositors redeem.

This is when the market value of a bank’s capital base really matters.

It seems there are two alternatives: we can either eliminate all capital requirements and just let the bank draw on the central bank to meet the cash needs of depositor redemption, or, we can eliminate fractional reserve banking.

The Federal Reserve’s recent practice of being willing to trade almost anything for T-bills is putting the banks well down the first road — with the addition of making the reserves of the central bank more or less worthless.

Good times.