Talk:Fractional-reserve banking

Example of money multiplier effect confusing

The chart does not correspond to the numbers on the graph since the graph stops at K bank loans, which makes the entire example confusing. The chart should be altered to note somewhere that eventually the total deposit size reaches 500 in theory, rather than stopping at 457

Three Fed economists recommend ditching the money multiplier concept in economics teaching

"This outdated link is often tied to the concept of the “money multiplier,” which is anchored in an obsolete explanation of how the Fed operates and influences banks." https://files.stlouisfed.org/files/htdocs/publications/page1-econ/2021/09/17/teaching-the-linkage-between-banks-and-the-fed-r-i-p-money-multiplier_SE.pdf

Opening statement

The wide opening statement about fractional-reserve banking being dominant is wrong. Fractional-reserve banking is not in widespread use in advanced economies. Modern banks are governed by the principle of risk sensitive capital adequacy, where they are required to hold liquid capital as a buffer against potential losses from their money issuing loans and investments. A notable exception to this is smaller banks in the United States. — Preceding unsigned comment added by 84.212.157.63 (talk) 11:56, 22 August 2022 (UTC)

That capital is their "reserves". SPECIFICO talk 13:51, 22 August 2022 (UTC)

@84.212.157.63 You have completely misunderstood the purpose of the buffer.

The buffer is not to soften the difference between their profitable and unprofitable capital ventures. They could do that with no buffer. Look at retail investors. Many of them invest all their spare capital.

No, the buffer serves to facilitate customers withdrawing money from their accounts. EditorPerson53 (talk) 14:23, 21 March 2023 (UTC)

It would be more accurate to say that fractional reserve banking is a theory of banking, and then expand that in the body of the article to say that it is one of the thee theories of banking identified by Werner (2016) Prosopon (talk) 04:35, 6 October 2023 (UTC)

Table by IMF to OECD maybe you wanna ... ?

... see within description to this pic (Pic by IMF presented 2019 to OECD).

Hi SPECIFICO,
how about this?
Maybe you like it?
Ok, well, it is trivial,
but if you need ...
Best regards, CGB 41.66.96.108 (talk) 15:56, 29 August 2023 (UTC)

Definition

There has been some exchange of opinion during the last days in edit summaries on the wording in the first, definitional sentence in the lead. Avatar317 has made this partly reversion, which I do not find quite satisfactory. I think, however, that a consensus could be reached as to a reformulation.

I believe that the present formulation is simply erroneous, the problem being the last part of the definition: that banks are required to keep a certain proportion of their deposits as reserves. This is not true in "almost all" countries today, a considerable number of countries, including some of the economically most important ones, not making any such requirement. I do not think, however, that this last part is a necessary part of the definition. Mankiw 2022, for example, simply says that a FRB system is one in which banks keep only a fraction of their deposits in reserve. This is clearly true of countries such as the US and Denmark, only the fraction is not determined directly by monetary authorities, but by the business policies of the commercial banks themselves. I suggest we simplify the first sentence to reflect this, which would make the "almost all countries" claim true (indeed, I believe it is true for all countries today). I also recommend we mention the hypothetical alternative, full-reserve banking, explicitly in the lead, to clarify what is the alternative to FRB, and explicitly mention some of the countries that do not impose a requirement, mainly the entire core Anglosphere. And then I recommend that we remove the references from the lead entirely, adding some referenced sentences in the main text with the same message that the lead can draw upon, so that the lead does not present statements that are not covered in the main text. Økonom (talk) 08:29, 10 November 2023 (UTC)

I agree with all your suggestions above: mentioning FRB as the the hypothetical alternative, moving the references, and the rewording. I think we should also mention the history of the diminishing reserve requirement, because IIRC, reserve requirements did exist and were often 5-15% in many countries decades ago. I'm not familiar with the specificity of what they were so I don't have the knowledge to craft that statement, nor have I seen sources covering that history. Separately, I would guess that "almost all countries" would be a more accurate claim than "all countries" since I am guessing that there are a few countries which do not have a functioning banking system. (but I may be wrong). ---Avatar317^(talk) 22:46, 10 November 2023 (UTC)

This is a tricky business because, among other things, there are plenty of otherwise Reliable Sources that are not up to date on current regulation and capital requirements that -- in the limiting case -- define the banking systems. "Fractional" reserve, suggesting a specific fraction or ratio, is now better described as "partial" reserve or someting similar. SPECIFICO talk 03:50, 11 November 2023 (UTC)

That's a VASTLY improved lead from what it was, THANKS!! ---Avatar317^(talk) 06:26, 15 November 2023 (UTC)