The money that the customers currently have the legal right to withdrawĮxpressed like this, a mechanism for banks to make loans becomes available. In the context of a full reserve banking system, we need to be slightly more precise about the meaning of the reserve ratio. Indeed there are some economists that have pronounced that full reserve banking is useless for precisely this reason… but they are mistaken and here’s why: It appears that banks can not act as financial intermediaries between savers and borrowers. This is clearly a very safe form of banking, but as described so far, the bank would simply be acting like a safe deposit box. With a ratio of 100% this means that even if every single customer demanded to take out their money, the bank will have it all available. It is easy to see that the higher the reserve ratio, the smaller the risk of a bank run. The money deposited in the bank by its customers Normally, the reserve ratio is defined approximately as follows: The confusion revolves around the definition of “reserve ratio”. The definition of full reserve banking can be a source of much confusion and consternation.
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