Having hopefully grasped the concept of banks 'splitting the zero', various people have proposed Full Reserve Banking, defined on Wiki as follows:
Full-reserve banking, also known as 100% reserve banking, refers to an alternative to fractional reserve banking in which banks are required to keep the full amount of each depositor's funds in cash, ready for immediate withdrawal on demand. Funds deposited by customers in demand deposit accounts (such as checking accounts) could not be loaned out by the bank because it would be legally required to retain the full deposit to satisfy potential demand for payments.
OK, that makes sense so far, banks would just be keepers and guardians of physical notes and organize transfers between people's current accounts.
Proposals for full reserve banking systems generally do not place such restrictions on deposits that are not payable on demand, for example time deposits or savings accounts.
Exactly, there's your massive bloody loophole which holes the whole thing under the waterline from the word 'go'.
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So along comes our mortgage borrower, wants to borrow £100.
All the banks need to go back to the good old 'splitting the zero' is to persuade a few current account holders with £100 in the bank (literally) not earning any interest to transfer that money to a 'time deposit' or 'savings account' or 'investment account' (as Positive Money call it, page 8).
The banks then allocate £100 cash to the mortgage borrower, he withdraws it, gives it to his vendor, who puts in back in the bank. Clearly, the money would not physically move, but it's easier to imagine it if it does. And clearly, there is no need for physical money at all, whether the Bank of England gives you a bit of paper or records your cash electronically is neither here nor there.
To make it even easier than that, let us imagine that the original current account holders convert their investment accounts back into current accounts (having been paid a small commission for the few hours that their money was inaccessible), and the vendor converts his current account to an investment account.
At the end of the day, how does the bank's balance sheet look different?
The physical cash is exactly the same, but now they have:
- an additional asset (the mortgage i.e. future payments in from the borrower).
- an additional liability (the vendor's investment account).
The zero has been split and the status quo has been reinstated.
I've tried explaining this to Positive Money and others, but they flatly refuse to accept that there is a massive fucking huge great colossal flaw in their 'full reserve banking' plans which you can actually see from space.
"Oh well, yes, maybe, but we'll think up a few more rules and regulations to prevent banks doing this, yada yada yada."
Top tip: anybody who talks about banking and uses the word 'reserve' or 'reserves' without specifying whether he means on the asset side (i.e. spare physical cash) or on the liability side (retained profits) doesn't know what he is talking about.
Debate Magazine
