This is not a radical idea though many will try to characterize it as such. 100% reserves for banks is actually quite a “conservative” idea.
With 100% bank reserves the credit addicts will scream and holler. The bankers will scream and holler. (Often they are one and the same.) Our economy however would be healthier.
Some will cry that limiting credit will limit business, but this is not necessarily true. Indeed with a more stable economic system what is lost in easy money may very well be made up in economic predictability.
(From The Telegraph)
In a system of 100pc reserve banking, none of these problems arises. As the term implies, all deposits are held on reserve, or in cash. The deposit bank is thereby deprived of its money creating privileges, but there is no risk of a run. Credit is instead provided by intermediaries that compete for these deposits and marry them directly with borrowers.
Simple. The credit cycle is abolished, and many of the things that so much concern regulators today – capital and liquidity requirements, risk weighting, how to get rid of the too-big-to-fail problem – would cease to be an issue.
What’s more, there would be no need for deposit insurance or oversight, beyond a framework for simple fraud prevention. Credit banks could be allowed to fail without risk of wider systemic damage.