On the Welfare Properties of Fractional Reserve Banking

Posted: 13 Aug 2013 Last revised: 25 Mar 2016

See all articles by Daniel R. Sanches

Daniel R. Sanches

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2013

Abstract

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 fractional reserve banking, such as the risk of insolvency for each bank. The goal of this paper is to show that a specific form of private bank coalition (a joint-liability arrangement) allows the members of the banking system to engage in fractional reserve banking in such a way that the solvency of each member bank is completely guaranteed. Under this arrangement, I show that a lower reserve ratio usually translates into a higher exchange value of bank liabilities, benefiting the consumers who use them as a means of payment.

Note: Superseded by Working Paper 15-20.

Keywords: bank coalition, fractional reserve banking, interbank credit, reserve management

JEL Classification: E42, G21

Suggested Citation

Sanches, Daniel R., On the Welfare Properties of Fractional Reserve Banking (December 1, 2013). FRB of Philadelphia Working Paper No. 13-32, Available at SSRN: https://ssrn.com/abstract=2308899 or http://dx.doi.org/10.2139/ssrn.2308899

Daniel R. Sanches (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

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Philadelphia, PA 19106-1574
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