Full reserve banking

[forsmant]

If I were to start a full reserve bank, how can I compete with the fractional reserve banks? They make money out of thin air where as I would have to wait until my depositors were willing to risk loaning their money to others.

Is this another example of path dependency argument? Fractional Reserve banking was seen as beneficial and forced full reserve off the market.

[IChooseLiberty]

If I were to start a full reserve bank, how can I compete with the fractional reserve banks? They make money out of thin air where as I would have to wait until my depositors were willing to risk loaning their money to others.

Is this another example of path dependency argument? Fractional Reserve banking was seen as beneficial and forced full reserve off the market.

So far as I see, it would allow you, as the bank, to invest less money since you'd have to keep a larger % of your assets liquid. Hence, you would not be able to compete with fractional reserve banks due to the fact that you would have to offer small yields on customer investments (ie savings, CDs, ect) and charge higher interest rates on consumer lines of credit (cards, financing, ect.)

You just wouldn't be able to compete, especially in this high-inflation environment.

Although, in a deflationary environment, you just might be viable... and I just finished a bottle of wine soooooooo I dunno LoL

[Fox McCloud]

I have a similar question--how could I set up a bank with 100% reserves, and not use usury (interest) at all, yet still make a profit?

Also, from what I can gather, we'll never have 100% reserve banks until we have a 100% reserve at the federal level--even then, the banks will still probably engage in fractional reserve lending practices. I would hope fractional reserve banking would become illegal...as they're generating something and lending something they don't have, then making a profit on something that doesn't even exist--you can't do it in any other industry, why should a banker have that special privilege?

I think this is what ultimately inhibited the US from ever having a true total Free Market--while the industries started out (and were for the most part) totally free in the 1800's, banking still has that special fractional reserve right (which no one else did), which helped created the "money trust", thus helping make a monopoly.

[Dr.3D]

I have a similar question--how could I set up a bank with 100% reserves, and not use usury (interest) at all, yet still make a profit?

Also, from what I can gather, we'll never have 100% reserve banks until we have a 100% reserve at the federal level--even then, the banks will still probably engage in fractional reserve lending practices. I would hope fractional reserve banking would become illegal...as they're generating something and lending something they don't have, then making a profit on something that doesn't even exist--you can't do it in any other industry, why should a banker have that special privilege?

I think this is what ultimately inhibited the US from ever having a true total Free Market--while the industries started out (and were for the most part) totally free in the 1800's, banking still has that special fractional reserve right (which no one else did), which helped created the "money trust", thus helping make a monopoly.

Unless we were to go back to a precious metal backed currency and you as a bank stored the money for people and changed them a small fee for the storage. I doubt you could make a profit.

As for lending and charging usury, in my opinion, this is just a way to rob people.

[AceNZ]

If I were to start a full reserve bank, how can I compete with the fractional reserve banks? They make money out of thin air where as I would have to wait until my depositors were willing to risk loaning their money to others.

The way you compete is by offering things that fractional reserve banks can't offer: safety, stability and morality.

The setup is easy: checking (current) accounts are held in full by the bank, and no loans are issued against them. Monthly fees would be charged for storage and management. All current accounts could be fully withdrawn at any time without causing a run on the bank. Only money deposited on a term basis (CDs) is loaned (with care to avoid loaning on a longer term than the deposits are for). The rate paid on CDs could probably be lower than market, to offset the extra safety features of the bank. Financially, the margins would definitely be lower due to the lack of the multiplier effect. The goal would be to make up the difference in quantity by attracting savers away from the fractional banks.

I know I would certainly bank with an institution like that, if it existed. Even if it paid a lower rate of interest, the features would be worth it.

From a borrower's perspective, the sell is a little harder. Most people don't care if the bank they're borrowing from stays solvent. There should still be a niche, though -- perhaps loans that can't be called, or other terms that the fractional lenders can't or don't normally offer.

[Shed]

The way you compete is by offering things that fractional reserve banks can't offer: safety, stability and morality.

The setup is easy: checking (current) accounts are held in full by the bank, and no loans are issued against them. Monthly fees would be charged for storage and management. All current accounts could be fully withdrawn at any time without causing a run on the bank. Only money deposited on a term basis (CDs) is loaned (with care to avoid loaning on a longer term than the deposits are for). The rate paid on CDs could probably be lower than market, to offset the extra safety features of the bank. Financially, the margins would definitely be lower due to the lack of the multiplier effect. The goal would be to make up the difference in quantity by attracting savers away from the fractional banks.

I know I would certainly bank with an institution like that, if it existed. Even if it paid a lower rate of interest, the features would be worth it.

From a borrower's perspective, the sell is a little harder. Most people don't care if the bank they're borrowing from stays solvent. There should still be a niche, though -- perhaps loans that can't be called, or other terms that the fractional lenders can't or don't normally offer.

The problem with allocating 100% reserve banks seems to be:
1. Most people don't understand the current banking system and believes banks are "safe" (this was me two weeks ago, until I grokked how it works).
2. If an allocated bank works within a central bank system, any fiat money deposited there will actually lose value, not gain it. This kind of bank doesn't make profit from loans in order to pay a good rate of interest.

[Corydoras]

There certainly is a market for this sort of banking-- Muslims.

http://en.wikipedia.org/wiki/Islamic_banking

http://en.wikipedia.org/wiki/Full-reserve_banking

In theory, Islamic banking is often synonymous with full-reserve banking, with banks achieving a 100% reserve ratio

[jonahtrainer]

If I were to start a full reserve bank, how can I compete with the fractional reserve banks? They make money out of thin air where as I would have to wait until my depositors were willing to risk loaning their money to others.

Is this another example of path dependency argument? Fractional Reserve banking was seen as beneficial and forced full reserve off the market.

GoldMoney is a great example of a full-reserve 'bank' which is really more like a warehouse operator.

[jclay2]

You guys are hilarious. Fractional Reserve banking is not evil. If you want your money to be guarenteed then go dig a hole and leave it there for ten years. Any bank will have risk to it, however, that inherent risk you take when you deposit your savings is paid back by interest. Banks are not the problem, the Federal Reserve is the problem. Go look up the history of banks and you will see why the banks lend. They use to be 100% full reserve until they noticed that a lot of people didn't come back for their money. Then they found out that they could just lend it and make the interest. Go screem at the fed and not the banks.

[Zavoi]

First of all, as has been mentioned, full-reserve banking is not compatible with a fiat money system. If you had a full-reserve bank, it would have to deal with gold, silver, or other tangible assets.

I have a similar question--how could I set up a bank with 100% reserves, and not use usury (interest) at all, yet still make a profit?

If I were to start a full reserve bank, how can I compete with the fractional reserve banks? They make money out of thin air where as I would have to wait until my depositors were willing to risk loaning their money to others.

There are two functions of a bank: to store people's money, and to match up borrowers and lenders. This is the same as with fractional-reserve banks, except that full-reserve banks cannot lend out money that isn't theirs. For the first service, a bank could make a profit by charging people a fee for the convenience of being able to use token money and checks rather than having to deal with miniscule particles or massive ingots of gold or silver. For the second service, the bank's role is to insulate lenders from the risk of borrowers defaulting. In this capacity, the bank is acting as an insurer of the loans it gives out. Therefore, the lenders would not be risking lending money directly to borrowers; they would be "risking" lending their money to he bank. The bank would need to keep this risk as close to zero as possible, probably by itself purchasing insurance, in order to reassure lenders.

As for lending and charging usury, in my opinion, this is just a way to rob people.

Not true. Borrowing and lending is the backbone of a modern economy. Interest is a rate to compensate the lender for inflation, risk, and the time value of money.

A full-reserve bank would be no more or less attractive to a borrower than a fractional reserve bank, because the interest rate would adjust to compensate for the inflation rate of whatever medium the loans are being made in. Also, if a significant number of lenders choose to use full-reserve banks rather than fractional-reserve banks, then fractional-reserve banks will have to raise their interest rates to get people to lend to them, alienating borrowers.

But now that you mention it, are there any laws/regulations in place that would actually prevent you from establishing a full-reserve bank in competition with the fractional-reserve banks?

[Dark Aerow]

You guys are hilarious. Fractional Reserve banking is not evil. If you want your money to be guarenteed then go dig a hole and leave it there for ten years. Any bank will have risk to it, however, that inherent risk you take when you deposit your savings is paid back by interest. Banks are not the problem, the Federal Reserve is the problem. Go look up the history of banks and you will see why the banks lend. They use to be 100% full reserve until they noticed that a lot of people didn't come back for their money. Then they found out that they could just lend it and make the interest. Go screem at the fed and not the banks.

Actually fractional reserve banking is a problem and it is evil for many reasons. The following is the most important reason.

The arguement that banks are merely participating in risk like any other bank is fallacious, this is because they are printing extra notes for your money without you knowing it. If everyone comes back to the bank to get their money without warning, you get screwed if you're not the first ones there. In this scenario the bank effectively stole your money and gave it to someone else. No one would ever knowingly do business with a bank that participated in this sort of banking unless they had no other choice or it was protected under law for the bank to practice this. Fractional reserve banking should be illegal. Banks would never be able to get away with fractional reserve banking if it was illegal.

I agree though, the persons to go after right now are the banking cartel and central banks. Afterall, we don't really have fractional reserve banking anyways...we have no reserve banking.

[AceNZ]

Fractional Reserve banking is not evil.

I guess it depends on your definition of evil. To me, charging interest on money created from thin air and being an agent of inflation are both immoral and therefore evil.

Banks are not the problem, the Federal Reserve is the problem.

It's impossible to separate the problems of fractional reserve banking from the problems with the Federal Reserve. The main reason the Fed was created was to help protect banks against the risks of fractional reserve banking -- much of what the Fed does involves managing bank reserves (FOMC actions, Fed Funds lending and the Discount Window, for example). Abolishing the Fed without also abolishing fractional reserve banking would just make things worse.

[forsmant]

I understand the way to compete as laid out by AceNZ. I was wondering if it would attract enough business to make a living. Fractional reserve banks make money off of interest on their loans and bank fees. Full reserve banking would not be able, initially, to even come close to the amount of loans that a Fractional reserve bank can, limiting the interest income.

In order to generate money to loan interest rates would have to be higher. There is a website dedicated to person to person loans. http://www.prosper.com/ Lenders chip in a small amount to fulfill a borrowers request. The interest rate varies based on mutual agreement. The loans on the site are unsecured.

I would prefer to have my deposits at a full reserve bank.

As for lending and charging usury, in my opinion, this is just a way to rob people.

Interest is not immoral. It is the price of time.

But now that you mention it, are there any laws/regulations in place that would actually prevent you from establishing a full-reserve bank in competition with the fractional-reserve banks?

I do not believe there are any laws prohibiting full reserve bank as the are a fractional reserve with that fraction being 1. The fed may try to force you out of business.

[Dr.3D]

Interest is not immoral. It is the price of time.

Has to do with my religious beliefs.

Leviticus 25:36,37
Psalm 15:5
Proverbs 28:8
Ezekiel 18:13
Ezekiel 18:17
Ezekiel 22:12

[forsmant]

Has to do with my religious beliefs.

Leviticus 25:36,37
Psalm 15:5
Proverbs 28:8
Ezekiel 18:13
Ezekiel 18:17
Ezekiel 22:12

Fair enough.

[AceNZ]

I was wondering if it would attract enough business to make a living.

There's no way to know for sure until someone tries it. However, my feeling is that it would work. It seems to me that any bank that can attract depositors should be able to turn a profit if run properly.

Fractional reserve banks make money off of interest on their loans and bank fees. Full reserve banking would not be able, initially, to even come close to the amount of loans that a Fractional reserve bank can, limiting the interest income.

The people who really benefit are the savers. Rather than charging higher interest on loans, a better strategy is probably to pay a little less interest on deposits, and charge slightly higher fees on checking accounts.


[QUOTE=forsmant;1318988]Interest is not immoral. It is the price of time.[/quote[

Sure, interest is fine as long as it's being charged against something of real value. However, I think charging interest on money that's created out of thin air is immoral.

I do not believe there are any laws prohibiting full reserve bank as the are a fractional reserve with that fraction being 1.

Right. The laws set minimum reserve requirements, not maximums -- there wouldn't be any legal issues in running a full-reserve bank.

[forsmant]

Sure, interest is fine as long as it's being charged against something of real value. However, I think charging interest on money that's created out of thin air is immoral.


.

I think creating money out of thin air is the immoral action.

[icon124]

I might be completely against everything you guys agree with but if I had the chance to start a bank I would take full advantage of fractional reserve and would take all of my profits (years down the road) and fund Libertarianism to the max haha

[forsmant]

Actually I was attempting to fulfill a niche market and rake in the dough. I was just seeing how many would bank at my new full reserve bank with outrageous fees.

[Corydoras]

There are some articles here that explain how Islamic banking works, but in quickly glancing through a few, I didn't see any reference to reserves.
http://www.universityislamicfinancia...inthenews.html

[american.swan]

Unless we were to go back to a precious metal backed currency and you as a bank stored the money for people and changed them a small fee for the storage. I doubt you could make a profit.

As for lending and charging usury, in my opinion, this is just a way to rob people.

How about no interest, just a one time fees?

A person wants to buy a house, the bank loans them the money with a fee of like 5% or whatever the bank wants to charge. The person then would have to pay back the loan + the non-interest based fee.

Credit?
Issue credit based on deposits. So a person deposits some gold/money and the user then can use a credit card with a maximum debt of 90% of the deposit/holding. The bank could make money by then lending out the deposit to others and charge a nominal fee for using the credit card.

Cost would have to be kept down. Start small in a small building in some local town with only one or two employees. Keep the vault locked and store some money perhaps in a vault at another location. Definitely spend money on computer systems because if your customers can't access their money very often they will shy away from your bank.

I would be interested in banking at a place like this. fee based income, no interest, gold stored in such a way(perhaps in a safer place then at the bank) where any customer could obtain gold/silver for their money if desired.

[Banana]

Not sure if this is relevant, but certainly something to go hand in hand with sound banking:

I used to work for Haggen's, a grocery store. Great company.

They had a nifty saving account for all employees which was just as liquid as a regular saving account; withdrawal with 24 hour advance notice. The great part about that account was that they paid 10% interest.

Yes, 10%.

When I found about that account, I couldn't believe it and of course assumed it was a high-risk account and talked to corporate bigwig about this. What they tell me is that they don't actually use money to invest in the company but rather uses it to apply for loan with better terms as they could claim they have more "assets", so even if the company went bankrupt, the money in saving account would be returned back to the employees, not to the creditors.

I'm not sure whether that mean they use it as a collateral for the loan (which seems to be the case to me), but was quite reassured that money wouldn't be lost even if they went bankrupt.

Too bad I didn't see this kind of account anywhere else and was sure sorry to lose it when I left the company. Anyway, I just thought that if more companies did this in junction to sound banking, we definitely would be better off collectively.

[american.swan]

Would this work? I don't know. Correct me....

What if a bank choose to do all it's business in gold and silver?

All fiat money deposits would be transfered into gold or silver bullion. The bank would store the bullion somewhere and even give it to the customers if the customer chose.

The bank would give checks and debit cards to the customers. The banks computer system would calculate the metal to fiat currency rate based on the rate like 2 hours in the past. The bank would charge a small fee.

The bank would allow for credit based on a deposit system where the customer deposited money and the bank would give the customer 90% to use as credit. The customer would pay again a small fee. (no interest)

The bank would want to make money by lending also and would use a "prosper.com" style approach to make money. The customer would KNOW that they have to pay back the money in gold or the value of the gold in fiat money going rate + a fee. Again, I don't like interest either but I have no problem with fees. The fee would pay the bank and the "prosper.com" style lenders.

In this way, perhaps, the bank would deal primarily with gold and silver. Would hold a vast majority of their reserves in gold and silver. and make money by charging fees to lenders.

Am I way off?

[Dr.3D]

Would this work? I don't know. Correct me....

What if a bank choose to do all it's business in gold and silver?

All fiat money deposits would be transfered into gold or silver bullion. The bank would store the bullion somewhere and even give it to the customers if the customer chose.

The bank would give checks and debit cards to the customers. The banks computer system would calculate the metal to fiat currency rate based on the rate like 2 hours in the past. The bank would charge a small fee.

The bank would allow for credit based on a deposit system where the customer deposited money and the bank would give the customer 90% to use as credit. The customer would pay again a small fee. (no interest)

The bank would want to make money by lending also and would use a "prosper.com" style approach to make money. The customer would KNOW that they have to pay back the money in gold or the value of the gold in fiat money going rate + a fee. Again, I don't like interest either but I have no problem with fees. The fee would pay the bank and the "prosper.com" style lenders.

In this way, perhaps, the bank would deal primarily with gold and silver. Would hold a vast majority of their reserves in gold and silver. and make money by charging fees to lenders.

Am I way off?

Sounds very good.
I like the idea of the conversion from fiat to gold and silver. The major problem would probably be the cost involved in changing the fiat to real money and back again. The beauty of it would be the savings would be more immune to inflation.

[shocker315]

I might be completely against everything you guys agree with but if I had the chance to start a bank I would take full advantage of fractional reserve and would take all of my profits (years down the road) and fund Libertarianism to the max haha

Except what many don't realize is the Fed System is set up to make it very difficult for a small or new banks to operate and prosper. It was designed that way. Remember the Fed itself is made up of large member banks. They don't really want new competition. The Fed regulations, restrictions, and requirements are many; and very difficult to comply with for new upstart smaller banks. Often requiring large amounts of capital. If a bank does thrive, they are quickly bought up and merged into the larger established banks.

If you notice, the actual number of different banking institutions drops with every recession. There where over 30,000 individual private banks in the 20's. Thousands went under after the Depression. And each recession hundreds of smaller banks are allowed to fail because they can not withstand the Fed created contractions of the money supply. Only the big established Wall street banks are able to call upon additional cash injections from the Fed, Dubai, and/or Congress for bailout and thus survive. How many smaller lending institutions have you seen fail or bought out by larger banks in the last year? Yet the big banks are supported when they have inevitable losses. The result, banking gets more and more concentrated in the hands of a few. It was designed that way.

Here is a graph from just the last 20 years...the number of commercial banks drops... yet the number of branches rise. If I could find a graph of the number of banks from 1900 to the present you would see a straight line down.

http://content.edgar-online.com/edga...6082MWI023.JPG

[Malakai0]

Has to do with my religious beliefs.

Leviticus 25:36,37
Psalm 15:5
Proverbs 28:8
Ezekiel 18:13
Ezekiel 18:17
Ezekiel 22:12

Check out the monetary system in use in Iran. They have a system including loans, that has no charging of interest. I'm not for or against it, I don't know much about it, but I read a really interesting article on it a few weeks ago.

[Dr.3D]

Check out the monetary system in use in Iran. They have a system including loans, that has no charging of interest. I'm not for or against it, I don't know much about it, but I read a really interesting article on it a few weeks ago.

Maybe that is why they think we are the devil incarnate.

[scooter]

I am with jclay2 here. The local banks making loans based off of their deposits are not robbing anyone. No one ever places any blame on the idiots who run up more debt than they can handle.

The Federal Reserve management of the banking system is the problem. Fractional reserves and interest are not inherently bad (can't argue with religious reasoning), but they can become bad from mismanagement and abuse. The Fed keeps reserve requirements entirely too low and they don't let interest rates float with the market. That's where you get most of the problems (along with limitless lending towards our federal government).

Please stop this "thin air" garbage. When Ron Paul says this he is talking about the federal government, not private banks. Just inform people that by opening a checking account, the bank is legally allowed to loan a large percentage of it out until they ask for it. People either are too stupid to know this is happening or obviously do not care.

[Corydoras]

if more companies did this in junction to sound banking, we definitely would be better off collectively.

Yes.

That's incredible about Haggen's. And they're STILL DOING IT!

http://www.haggen.com/EmploymentBenefits.aspx

Haggen's own independent Savings Plan pays 10% interest on any funds you put in. Payroll deductions into this account are also available. Interest is computed weekly and compounded quarterly.

[Banana]

Yes.

That's incredible about Haggen's. And they're STILL DOING IT!

http://www.haggen.com/EmploymentBenefits.aspx

Yeah- that plan has been around for quite a while and I have confidence it's not going anywhere.

I always have liked how it remained independent even as it grew into other states and didn't become just one of another major grocery store.

Really a shame to see a company taking care of its employee as a rarity than the norm.