The Legitimacy of Loan Maturity Mismatching: A Risky, But Not Fraudulent, Undertaking

Philipp Bagus and David Howden

MPRA Paper from University Library of Munich, Germany

Abstract: Barnett and Block (2008) attack the heart of modern banking by claiming that the practice of borrowing short and lending long is illicit. While their claim of illegitimacy concerning fractional reserve banking can be defended, their justification lacks substance. Their claim is herein strengthened by a legal analysis of deposits and loans based on Huerta de Soto (2006). A combined legal and economic analysis shows that while lending deposits can be regarded as illicit, the maturity mismatching of loans is legitimate contrary to Barnett and Block's claim. No over-issuance of property rights is involved with this practice once the distinction between present and future goods is taken into account. However, while the practice is not illicit per se, it is greatly assisted and developed through the presence of a fractional reserve banking system, and can sometimes breed detrimental effects.

Keywords: Time deposits; private property rights; fraud; maturity mismatching; fractional reserve banking (search for similar items in EconPapers)
JEL-codes: E2 E20 E59 P16 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (37)

Published in The Journal of Business Ethics 90.3(2009): pp. 399-406

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Related works:
Journal Article: The Legitimacy of Loan Maturity Mismatching: A Risky, but not Fraudulent, Undertaking (2009)
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