On the welfare properties of fractional reserve banking

Daniel Sanches

No 15-20, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Supersedes Working Paper 13-32/R. 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 in-solvency 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.

Keywords: Fractional reserve banking; Reserve management; Risk sharing (search for similar items in EconPapers)
JEL-codes: E42 G21 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2015-04-14
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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Related works:
Working Paper: On the welfare properties of fractional reserve banking (2013)
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