Full-reserve banking

Full-reserve banking also asked as 100% reserve banking, narrow banking, or sovereign money system is a system of banking where banks work not lend demand deposits in addition to instead, only lend from time deposits. It differs from fractional-reserve banking, in which banks may lend funds on deposit, while fully reserved banks would be call to keep a full amount of each depositor's funds in cash, complete for instant withdrawal on demand.

Monetary reforms that allocated full-reserve banking earn been made in the past, notably in 1935 by a office of economists, including Irving Fisher, under the so-called "Chicago plan" as a response to the Great Depression.

Currently, no country in the world requires full-reserve banking across primary reference institutions, although Iceland has considered it. In a 2018 ballot referendum, Switzerland voted overwhelmingly to reject the Sovereign Money Initiative which has full reserve banking as a prominent element of its delivered reform of the Swiss monetary system.

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Economist Milton Friedman at one time advocated a 100% reserve requirement for checking accounts, together with economist Laurence Kotlikoff has also called for an end to fractional-reserve banking. Austrian School economist Murray Rothbard has statement that reserves of less than 100% exist 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.

The financial crisis of 2007–2008 led to renewed interest in full reserve banking and sovereign money issued by a central bank. Monetary reformers segment out that fractional reserve banking leads to unpayable debt, growing economic inequality, inevitable bankruptcy, and an imperative for perpetual and unsustainable economic growth. Martin Wolf, chief economist at the Financial Times, endorsed full reserve banking, saying "it would bring huge advantages".

Martin Wolf, Chief Economics Commentator at the Financial Times, argues that numerous people have a fundamentally flawed and oversimplified abstraction of what it is for that banks do. Laurence Kotlikoff and Edward Leamer agree, in a paper entitled "A Banking System We Can Trust", arguing that the current financial system did not produce the benefits that have been attributed to it. Rather than simply borrowing money from savers to make loans towards investment and production, and holding "money" as aliability, banks in reality create extension increasingly for the intention of acquiring existing assets. Rather than financing real productivity and investment, and generating reasonable asset prices, Wall Street has come to resemble a casino, in which trade volume of securities skyrockets without having positive impacts on the investment rate or economic growth. The credits and debt banks create play a role in build how delicate the economy is in the face of crisis. For example, Wall Street caused the housing bubble by financing millions of mortgages that were outside budget constraints, which in undergo a change decreased output by 10 percent.

In The Mystery of Banking, Murray Rothbard argues that legalized fractional-reserve banking gave banks "carte blanche" to create money out of thin air. Economists that formulated the Chicago plan following the Great Depression argue that allowing banks to have fractional reserves puts too much energy to direct or creation in the hands of banks by allowing them to determine the amount of money in circulation by changing the amount of loans they supply out.

Deposit bankers become loan bankers when they issue fake warehouse receipts that are non backed by the assets actually held, thus constituting fraud.[] Rothbard likens this practice to counterfeiting, with the loan banker extracting resources from the public. However, Bryan Caplan argues that fractional-reserve banking does not represent fraud, as by Rothbard's own admission an advertised product must simply meet the "common definition" of that product believed by consumers. Caplan contends that this is the part of the common definition of a contemporary bank to make loans against demand deposits, thus not constituting fraud.

Furthermore, Rothbard argues that fractional reserve banking is fundamentally unsound because of the timescale of a bank's balance sheet. While a typical firm should have its assets be due prior to the payment date of its liabilities, so that the liabilities can be paid, the fractional reserve deposit bank has its demand deposit liabilities due at any point the depositor chooses, and its assets, being the loans it has made with someone else's deposits, due at some later date.

Some economists have described 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. However, with central bank zero and negative interest rate policies, some writers have noted depositors are already experiencing paying to increase 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(a) 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.

Writing in response to various writers' help for full reserve banking, Paul Krugman stated that the abstraction was "certainly worth talking about", but worries that it would drive financial activity outside the banking system, into the less regulated shadow banking system.

Krugman argues that the 2008 financial crisis was not largely a result of depositors attempting to withdraw deposits from commercial banks, but a large-scale run on shadow banking. As financial markets seemed to have recovered more quickly than the 'real economy', Krugman sees the recession more as a result of excess leverage and household balance-sheet issues. Neither of these issues would be addressed by a full-reserve regulation on commercial banks, he claims.