The 100% Reserve Reform: Calamity or Opportunity?

Abstract

This paper considers the various 100% Reserve plans that have appeared since the interwar period and have since then been adapted. In all formulations of those schemes, Government liabilities (cash, central bank reserves and short-term Treasuries) back banks’ sight deposits. This organization contrasts with current so-called “fractional reserve banking”, in which, as a result of reserve requirements imposed by the central bank (Drumetz et al., 2015), reserves back only a small fraction of sight deposits. The paper briefly presents the six categories of plans. It then highlights their common features as well as their differences, showing that the differences are more numerous than the common features. The criticisms voiced against the different formulations of 100% Reserves are exposed, adding those of the author and distinguishing between the doubts expressed on the validity of the analysis on one hand, and some undesirable consequences of the reform on the other. In spite of these criticisms, it then shown that the 100% Reserve reform is becoming topical, with recent private sector, central banks and political initiatives that relate to it. Overall, the 100% Reserve reform does not appear as a meaningful opportunity to improve the functioning of banking systems. Furthermore, at least one of its variants could easily turn into a calamity. Fortunately, it is not that variant that is getting more topical.