On the welfare properties of fractional reserve banking

• Autores: Daniel Sanches
• Localización: International economic review, ISSN-e 1468-2354, Vol. 57, Nº. 3, 2016, págs. 935-954
• Idioma: inglés
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• Resumen

  • Monetary economists have long recognized a tension between the benefits of fractional reserve banking, such as the ability to undertake more profitable (long-term) investment opportunities, and the difficulties associated with it, such as the risk of insolvency for each bank and the associated losses to bank liability holders. I show that a specific banking arrangement (a joint-liability scheme) provides an effective mechanism for ensuring the ex post transfer of reserves from liquid banks to illiquid banks, so it is possible to select a socially efficient reserve ratio in the banking system that preserves the safety of bank liabilities as a store of value and maximizes the rate of return paid to bank liability holders.