Getting rid of fractional reserve banking

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  • #18174

    Hi,

    Lets assume that fractional reserve banking contributes to the business cycle and the current setup is bad, 100% reserve demand deposits are the way to go, and that government backing of banks or insuring of deposits is bad. How do we remove all of these things? If the government just said ‘yep we’re 100% deregulating and getting out of finance, no more deposit insurance, no more central banks’, it would cause a run on the banks because people know (and those that didn’t would quickly find out) that their money isn’t there. So my question is more an opinion than an economics question, but how would you move from ~10% reserve banking as it is now, to a more ‘proper’ setup?

    Lets also assume that this has to be done through government because of how the political system works atm.

    #18175
    jmherbener
    Participant

    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.

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