Should banks hold 100% reserves?
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The idea of banks holding 100% reserves has both supporters and detractors, as outlined in various discussions among economists and financial experts:
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Resource Costs and Transition Issues: One concern is the resource cost of maintaining 100% reserves, especially in gold. For instance, and discussed that transitioning to a 100% reserve requirement could involve significant costs in terms of the gold needed to back up the currency 1.
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Safety and Market Opportunity: highlights the potential market opportunity for banks designed on a 100% reserve basis. Such banks could attract large institutional depositors by offering a very safe and low-cost operation, competing with traditional banks perceived as "too big to fail" 2.
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Bank Lending and Economic Impact: There's also the concern that if banks were required to hold 100% reserves, their ability to lend out money would be severely restricted. This could hinder economic activities driven by loans, like commercial real estate and personal loans. discussed how the Fed's opposition to fully reserved banks stems from a belief that the purpose of banks is to hand out loans, which are crucial to the economy 2.
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Liquidity Requirements and Arbitrage Opportunities: noted that large banks often have reserves that are not truly "excess" but necessary to meet regulatory requirements and liquidity needs. This can prevent them from taking advantage of potential arbitrage opportunities in the market 3.
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Leverage and Risk Distribution: According to , even with less debt and more equity, banks could still safely finance their operations. He proposes that by having banks fully equity-financed, the overall risk held by the private sector remains the same, just distributed differently. This could mitigate the risk of bank runs without needing 100% reserves in the traditional sense 4.
Each perspective provides insight into the complexities and potential trade-offs involved in requiring banks to hold 100% reserves.