It’s good to see the European Union trying to force member states to stop subsidising banks. That’s according to this Reuters article. Given half a chance, bankster / criminals will always try to offer local politicians large wads of cash in brown envelopes in exchange for bank friendly legislation, including the bail out of banks with taxpayers’ money.
This must stop.
Those depositing money in banks should have to face reality. If they want to have their money loaned on to mortgagors, businesses, Greece etc then those depositors should carry the risk, not taxpayers. I.e. if the relevant bank goes belly up, then depositors, bondholders etc can get stuffed, far as I’m concerned. And it’s good to see the EU agrees with that.
Alternatively, if depositors want a chunk of their money to be totally safe, then they’re entitled to that safety. In the UK depositors can already obtain total safety by depositing money with National Savings and Investments. However, there’d be nothing to stop every high street bank I the UK offering totally safe accounts where relevant monies are simply lodged with the Bank of England.
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P.S. Having done a bit more digging, it looks like the EU will not bail in depositors with up to €100k. So to that extent, the EU proposals are not a move towards full reserve. However, in that sums above €100k will be bailed in and in that bank bondholders will be bailed in, the EU proposals do constitute a move towards full reserve.
This blogging system has gone mad this morning. So I’m copying and pasting a comment by “John” manually:
ReplyDeleteIs fractional reserve relevant in a banking system that doesn't have a reserve requirement? Doesn't a reserve free requirement disprove the idea of a fractional reserve and prove the endogenous money system we in fact have.
This isn't an argument for the system we now have over, say, full reserve. It is simply an acceptance of the fact that the system we have is an endogenous one, not a fractional reserve one.
The phrases fractional and full reserve are very unsatisfactory: they don’t accurately describe the bank systems involved. So to be more precise…
DeleteBy fractional reserve, I mean a system where private banks have a stock of base money (aka “reserves”) which is small relative to their total assets – and because they HAVE TO maintain that stock, or because they CHOOSE TO for the purpose of settling up with each other.
In contrast, under full reserve, the bank industry is split in two. The half that accepts deposits only lodges relevant monies at the central bank. I.e. that half has a reserve ratio of 100%. In contrast, the second half lends to mortgagors, businesses etc, but that is funded just by shares / equity. And it’s virtually impossible for that system to fail.
In contrast, it’s very easy for a fractional reserve system to fail: the assets of banks only have to fall in value by a small amount (e.g. because their loans to Greece are not worth the paper they’re printed on) and relevant banks are bust.
Ralph, your definition is fair and reasonable (and would be a good new definition to be adopted) but it isn't what is traditionally meant by fractional reserve. Textbooks and economists mean reserves are a base to be multiplied by banks into money as loans.
ReplyDeleteNow as far as I can see, banks create money with or without a reserve requirement. The traditional theory of fractional reserve banking argues that a reserve is required for banks to create money as loans, yet Australia, New Zealand, Canada, Sweden and the UK have a zero reserve requirement. How does the traditional theory of fractional reserve banking explain how banks in countries with a zero reserve requirement create money? Presumably it can't and the traditional theory of fractional reserve banking must be wrong, thereby proving, by a reductio ad absurdum process, that the theory of endogenous money explains the monetary system we in fact have.
John, I’m not disputing that commercial banks create the majority of money in circulation, and I’m not disputing the endogenous money idea. But in countries where there is no reserve requirement, commercial banks still keep a stock of reserves to enable them to settle up with each other. So those banks are “fractional reserve” as per my definition. But clearly they are not fractional reserve as per the narrower textbook definition, i.e. where banks have to maintain a stock of reserves equal to e.g. 10% of their assets, or some other percentage which is much more than they need for settling up purposes.
DeleteBut that is all very semantic and unimportant compared to the basic distinction between fractional reserve (on any definition) and full reserve. And that distinction is that it is virtually impossible for either half of the bank industry to fail under full reserve. The lending half can’t fail because it doesn’t owe anything to anyone: equity is not a real liability. And the safe half cannot fail because relevant monies are just that: totally safe.