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On the welfare properties of fractional reserve banking

  • Sanches, Daniel

Superseded by Working Paper 15-20. 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 fractional reserve banking, such as the risk of insolvency for each bank. The goal of this paper is to show that a specific form of private bank coalition (a joint-liability arrangement) allows the members of the banking system to engage in fractional reserve banking in such a way that the solvency of each member bank is completely guaranteed. Under this arrangement, I show that a lower reserve ratio usually translates into a higher exchange value of bank liabilities, benefitting the consumers who use them as a means of payment.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 13-32.

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Length: 36 pages
Date of creation: 2013
Date of revision: 04 Feb 2013
Handle: RePEc:fip:fedpwp:13-32
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