Reply To: Getting rid of fractional reserve banking


The enormous build-up by commercial banks of excess reserves afforded by Ben Bernanke’s QEs have created both a potential for hyperinflation on the one hand and radical bank reform on the other.

On Dec. 9, 2013, commercial banks had Total Checkable Deposits of $1,423.2 billion and Excess Reserves of $2,440.8 billion. Because the Fed has the authority to set the reserve requirement ratio for commercial banks, it could simply require them to hold 100 percent reserves. Their current Required Reserves are $124.5 billion. Thus, banks would have to convert $1,298.7 billion of their excess reserves into required reserves leaving them $1,142.1 billion in excess reserves. Then the Fed would need to convert the required reserves held by banks as deposits with the Fed into cash that commercial banks would hold in their vaults. At that point, commercial banks would be 100 percent reserve banks and deposit insurance and regulation could be removed without any possibility of adverse bank runs.