Prominent Economists Call for End to Fractional Reserve Banking

Another run at fractional banking. 

A not so novel concept that would eliminate the risk and gambling amongst the banks.



Washington's Blog
30 April 2014

Challenging a Sacred Cow of Banking Dogma

Excessive leverage by the banks was one of the main causes of the Great Depression and of the 2008 financial crisis.

As such, lower levels of “fractional reserve banking” – i.e. how many dollars a bank lends out compared to the amount of deposits it has on hand – the more stable the economy will be.

But economist Steve Keen notes (citing Table 10 in Yueh-Yun C. OBrien, 2007. “Reserve Requirement Systems in OECD Countries”, Finance and Economics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal Reserve Board):

The US Federal Reserve sets a Required Reserve Ratio of 10%, but applies this only to deposits by individuals; banks have no reserve requirement at all for deposits by companies.

So huge swaths of loans are not subject to any reserve requirements.

Indeed, Ben Bernanke proposed the elimination of all reserve requirements for banks:

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

Economist Keen informs Washington’s Blog that about 6 OECD countries have already done away with reserve requirements altogether (Australia, Mexico, Canada, New Zealand, Sweden and the UK).

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