When banks kept 100% of their reserve as deposit then it is called full reserve banking. It is an alternative to fractional reserve system and with full reserves; banks are in a position of immediate withdrawal based on demand. The full reserve system comes with several cost with only benefit of a secure depositary system and ensure a stable money supply. The primary criticism of full-reserve system is that it impedes economic growth by restricting capital formation and financial intermediation. With full reserve system all the deposits stands idle to fulfill depositor’s claim on demand (Dow, Johnsen & Montagnoli, 2015). This reduces available funds to borrowers leading to a decline in aggregate spending and demand. Full reserve prevents the money supply growth and hampers liquidity. Switching to such a system thus brings a credit crunch in the economy.
Role of banks in future world of crypto currencies
In the history of banking, there are three well-known functions of banks- providing a secure storage called warehouse function, loan function and clearing system. With Bitcoin system, it is realized that the warehousing function was needed because of the physical factor and not for fundamental ones. The attributes of traditional money is present in the Bitcoin system and have two additional advantages such as there is no need of physical space and it is weightless (Narayanan et al., 2016). This reduces the role of banks as warehouse.
Regarding the clearing role of banks, the Bitcoin system has minimizes or eliminates risk of monetary exchange. Transaction becomes clearer than they were before.
Dow, S., Johnsen, G., & Montagnoli, A. (2015). A critique of full reserve banking. Sheffield Economic Research Paper Series, (2015008).
Narayanan, A., Bonneau, J., Felten, E., Miller, A., & Goldfeder, S. (2016). Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction. Princeton University Press.