Full-reserve banking (also known as 100% reserve banking) is a proposed alternative to fractional-reserve banking in which banks would be 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) would 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 such systems generally do not place such restrictions on deposits that are not payable on demand, for example time deposits.
Monetary reforms that included full-reserve banking have been proposed in the past, notably in 1935 by a group of economists, including Irving Fisher, as a response to the Great Depression. More recently, there has been some renewed interest following the Great Recession.
Currently, no country in the world requires full-reserve banking. Banks operating under a full-reserve ratio generally do so by choice or by contract, although the governments in some countries such as Iceland and the US have considered implementing full reserve banking to avoid future financial crises. In 2018 Switzerland will vote on the Sovereign Money Initiative which has full reserve banking as a prominent component of its proposed reform of the Swiss monetary system.
Video Full-reserve banking
Views
In favor
Economist Milton Friedman at one time advocated a 100% reserve requirement for checking accounts, and economist Laurence Kotlikoff has also called for an end to fractional-reserve banking. Austrian School economist Murray Rothbard has written that reserves of less than 100% constitute fraud on the part of banks and should be illegal, and that full-reserve banking would eliminate the risk of bank runs. Jesús Huerta de Soto, another economist of the Austrian school, has also strongly argued in favor of full-reserve banking and the outlawing of fractional reserve banking; see his 2006 book Money, Bank Credit, and Economic Cycles.
In the wake of the 2008 financial crisis, Martin Wolf, chief economist at the Financial Times, endorsed full reserve banking, saying "it would bring huge advantages".
Against
Some economists have noted that under full-reserve banking, 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 probably be rejected by the public although with central bank zero and negative interest rate policies, some writers have noted depositors are already experiencing paying to put their savings even in fractional reserve banks. In their influential paper on financial crises, economists Douglas W. Diamond and Philip H. Dybvig warned that under full-reserve banking, since banks would not be permitted to lend out funds deposited in demand accounts, this function would 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.
John H. Cochrane also has come out in favor of full reserve banking. In a response in the New York Times, Paul Krugman stated that 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.
Maps Full-reserve banking
See also
References
External links
- The Chicago Plan Revisited, IMF Working Paper, Jaromir Benes and Michael Kumhof, August 2012
- Alternatives to Conventional Banking Products By Maryam Ayaz
- In Defence of Fractional Reserve Banking (Pascal Salin)
Source of the article : Wikipedia
0 Comments