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Full-reserve banking

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Full-reserve banking, also known as 100% reserve banking, refers to an alternative to fractional reserve banking in which banks are required to keep the full amount of each depositor's funds in cash, ready for immediate withdrawal on demand. Funds deposited by customers in demand deposit accounts (such as checking accounts) could not be loaned out by the bank because it would be legally required to retain the full deposit to satisfy potential demand for payments. Proposals for full reserve banking systems generally do not place such restrictions on deposits that are not payable on demand, for example time deposits or savings accounts.[1]

Monetary reforms that included full-reserve banking have been proposed in the past, notably by a group of economists, including Irving Fisher, as a response to the Great Depression.[2][3] Full-reserve banking is not currently legally enforced anywhere in the world, although a number of banks and financial institutions claim to practice it, including Euro Pacific Bank[4], GoldMoney [5], Bitreserve[6].

Views on full-reserve banking

In the post-World War II era, economists have shown little interest in 100%-reserve banking, although some have examined the issue and concluded that the costs and inconvenience of a full-reserve banking system would outweigh any benefits.[7][8] However, economist Milton Friedman at one time advocated a 100% reserve requirement for checking accounts[9] and economist Laurence Kotlikoff has also called for an end to fractional-reserve banking.[10] According to Austrian economist Murray Rothbard, reserves of less than 100% constitute fraud on the part of banks, and full-reserve banking would eliminate the risk of bank runs.[11][12]

Some economists have noted that because banks would not earn revenue from lending against demand deposits, depositors would have to pay fees for the services associated with checking accounts. This, it is felt, would likely be rejected by the public.[8][13] Economists Diamond and Dybvig have warned that under full-reserve banking, since banks would not be permitted to lend out funds deposited in demand accounts, this function could be expected to be taken over by unregulated institutions. Unregulated institutions (such as high-yield debt issuers) would take over the economically necessary role of financial intermediation and maturity transformation, therefore destabilizing the financial system and leading to more frequent financial crises.[7][14]

In the wake of the 2008 financial crisis, Martin Wolf endorsed full reserve banking, saying "it would bring huge advantages".[15] John H. Cochrane also has come out in favor of full reserve banking.[16] In a response in the New York Times, Paul Krugman said the idea was "certainly worth talking about", but worries that it would drive financial activity outside the banking system, into the less regulated shadow banking system.[17]

While there is currently no country in which the reserve requirement for banks is 100%, financial institutions that operate on this basis do exist.[citation needed]

See also

References

  1. ^ "A Program for Monetary Reform, Douglas, Paul H.; Hamilton, Earl J.; Fisher, Irving; King, Willford I.; Graham, Frank D.; Whittlesey, Charles R. (July 1939)".
  2. ^ Fisher, Irving (1935), 100% Money
  3. ^ Weisenthal, Joe. "BAN ALL THE BANKS: Here's The Wild Idea That People Are Starting To Take Seriously". Business Insider.
  4. ^ "Euro Pacific Bank 100% reserve banking".
  5. ^ "GoldMoney external audit".
  6. ^ "Bitreserve audit".
  7. ^ a b Diamond, Douglas W (Jan 1986), "Banking Theory, Deposit Insurance, and Bank Regulation", The Journal of Business, 59 (1): 55–68, doi:10.1086/296314, JSTOR 2352687, In conclusion, 100% reserve banking is a dangerous proposal that would do substantial damage to the economy by reducing the overall amount of liquidity. Furthermore, the proposal is likely to be ineffective in increasing stability since it will be impossible to control the institutions that will enter in the vacuum left when banks can no longer create liquidity. Fortunately, the political realities make it unlikely that this radical and imprudent proposal will be adopted. {{citation}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
  8. ^ a b White, Lawrence H. (Winter 2003). "Accounting for Fractional-Reserve Banknotes and Deposits—or, What's Twenty Quid to the Bloody Midland Bank?" (PDF). The Independent Review. 7 (3): 423–41. ISSN 1086-1653.
  9. ^ Solow, Robert M. (March 28, 2002), "On the Lender of Last Resort", Financial crises, contagion, and the lender of last resort, Oxford University Press, p. 203, ISBN 978-0-19-924721-9 {{citation}}: External link in |chapterurl= (help); Unknown parameter |chapterurl= ignored (|chapter-url= suggested) (help)
  10. ^ Kotlikoff, Laurence J.; Leamer, Edward (April 23, 2009), "A Banking System We Can Trust" (PDF), Forbes.com, retrieved September 14, 2010
  11. ^ Rothbard, Murray N., The Mystery of Banking (PDF), Ludwig von Mises Institute, ISBN 978-1-933550-28-2, retrieved September 14, 2010
  12. ^ The Case for a 100% Gold Dollar, Murray Rothbard
  13. ^ Allen, William (October 1993). "Irving Fisher and the 100 Percent Reserve Proposal". Journal of Law and Economics. 36 (2): 703–17. doi:10.1086/467295. JSTOR 725805.
  14. ^ Diamond, Douglas; Philip Dybvig (Winter 2000). "Bank Runs, Deposit Insurance, and Liquidity" (PDF). Federal Reserve Bank of Minneapolis Quarterly Review. 24 (1): 14–23. Retrieved 29 August 2012.
  15. ^ Weisenthal, Joe. "BAN ALL THE BANKS: Here's The Wild Idea That People Are Starting To Take Seriously Read more: http://www.businessinsider.com/banning-banks-2014-4#ixzz30CZefjb0". {{cite web}}: External link in |title= (help)
  16. ^ Cochrane, John. "Toward a run - free financial system" (PDF).
  17. ^ Krugman, Paul. "Is A Banking Ban The Answer?". New York Times.
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