Partial bank reservation is a way of financial interaction in which banks can take most of the client’s deposit funds in order to put them into circulation. And only a small part of the amount can be withdrawn at a particular point in time.
By law, banks are required to hold a small portion of the funds invested in them in the form of tangible assets. However, they can operate with the “imaginary” for the most part without any problems, narrowing it down in the form of loans for other individuals and organizations. This process can be repeated several times with different banks. The total “money supply” is increasing. And the actual one remains unchanged. That is, banks literally “make money” from the air.
Such loans and debts are the basis for the efficient operation of the modern banking system. However, it is impossible to do without real money, so the country's central bank regularly introduces new portions of currency in circulation to guarantee banks the possibility of withdrawing at least part of the funds in circulation.
History of creation
For the first time, this idea was effectively implemented on the basis of the Swedish Riksbank in 1668. However, now we are talking about using the system at the state level - and long before that, there were private banks using the partial reserve system. Actually, the idea was extremely original - to let available capital into circulation, and not to deal exclusively with its passive accumulation.
Following Sweden, similar systems, which turned out to be extremely beneficial for the economy, began to be applied by other countries. Not all, however, are successful. In the USA, for example, such Central banks were created three times - in 1791, in 1816 and in 1913. The last time it turned out in succeeded - the creation of the US Federal Reserve Bank, which now controls the country's economy by regulating interest rates, pricing and employment.
The main problem for banks
What will happen if all active bank depositors decide to withdraw their funds? There can be many reasons for this - both distrust of a particular bank and the economic crisis in the country. In the worst case, the bank expects bankruptcy, as it will be unable to fulfil its financial obligations. Customers will at best receive partial compensation. As for loans, they don’t go anywhere - either the interim administration or other banks that will “buy” these loans will follow their repayment. The only question is the scale.
If a similar situation occurs with one bank, the situation for its customers is sad, but not critical. But if there are several banks, and even large ones, this can undermine the country's economy in total.
Therefore, it is extremely unprofitable for banks when the “flight of depositors” starts. For this, the procedures for issuing deposits are becoming more complicated and they starting active work on increasing financial reputation and the creation of full reserves of funds of an obligatory minimum.
However, this does not always help. For example, the Great Depression in the USA happened also due to the mass withdrawal of depositors. No customers - no money for loans. If there is no money for loans - there is nothing to make money from. And as a result - a general economic decline.
Disadvantages and advantages
Partial bank reservation allows bank customers to receive interest income from their deposits. However, it is incommensurably less than the total profit of the bank, which has already been described above. However, this system is now adopted in almost all developed countries of the world, even at the government level it is regulated and controlled.
The problem is that this system is unstable. It is based on people's trust in banks, which can easily be undermined by the next economic crisis. It is on trust, and not on real money. And as soon as panic among the population begins, banks, and then the entire economy of the country, will face an extremely unpleasant situation. Residents of Ukraine could observe a similar situation in the spring of 2014. Fortunately, the economy, although seriously shaken, has survived.
However, it was impossible to withdraw money from the accounts for a long time.
Partial Bank Reservation and Cryptocurrencies
Briefly, in decentralized automated peer-to-peer systems, partial bank reservation is not possible. There is no central storage node that everyone supposes to trust, no deposit accounts with interest, no loans. It is also worth considering that almost all cryptocurrencies have limited emissions - “making money from the air” does not work, because for each token you can trace the transfer chain. In any case, profit in blockchain systems is generated according to other principles that are more beneficial to each user, and not to an intermediary bank.
Finance and investmentAuthor: EXBASE.IO | Nov 09, 2020
Finance and investmentAuthor: EXBASE.IO | Nov 03, 2020
NewsAuthor: EXBASE.IO | Sep 03, 2021