Reserve Banking - Essay Example

Comments (0) Cite this document
This is mainly because the industry plays a significant role, in determining whether an economy would grow or not. This is based on the fact that the banks are responsible for issuing out credit and…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER97.3% of users find it useful
Reserve Banking
Read TextPreview

Extract of sample "Reserve Banking"

Banking System: The banking industry is a very important financial sector within an economy. This is mainly because the industry plays a significant role, in determining whether an economy would grow or not. This is based on the fact that the banks are responsible for issuing out credit and loans, to business personalities, which in turn can help in the growth of the economy (Quagliariello, 13). However, if the industry is left unchecked, it can also lead to the exploitation of people, and the decline of an economic system. An example is the sublime crisis, which was created because of the unregulated lending of the banking organizations in the mortgage sector. There are two types of banking system that is the fractional banking system, and the 100% reserve banking system. This paper is a comparison and a contrast of these two types of banking system.
The 100% reserve banking system is a practice whereby the full amounts of the funds of a depositor are made available to him or her at any given time. In the current global business environment, this system of banking does not exist. This is ever since the 1800s. The major reason is because banking organizations need to make profits, and having a 100% reserve banking system makes it difficult for these organizations to make money (Quagliariello, 17). Therefore, banking organizations and institutions would trade with the deposits in their vaults, for purposes of making profits. These trades involves, issuing of loans, mortgages, and involving themselves in the money market. However, in order to make some money, banking organizations that operates under a 100% reserve banking system, are involved in charging their customers some money, just for purposes of making them to be able to access their services.
Lending in this kind of a system normally occurs when there is a separate arrangement, between the depositor and the banking organization, where the depositor is required to authorize the banking organization to lend some of his or her money. This is in direct contrast to the fractional system of reserve banking (Quagliariello, 27). Under this type of banking system, only a fraction of the depositor’s money is able to stay in the banking vaults, and the rest of the rest of the money are used for purposes of trade. Banks normally loan out these money, at an interest. Banks normally carry out this activity, through a vehicle referred to as a certificate of deposit.
This system normally works, when the banking organization takes the money that is not needed by the customer, and it invests it in a specific profit centered venture. The depositor and the banking organization would share some level of risks, and also some level of gain. This type of arrangement does not exist in the 100% reserve banking system. When compared to the fractional system, the 100% reserve banking system does not create a financial crisis, or a systematic risk (Quagliariello, 33). Furthermore, this type of a banking system eliminates the need of creating a central bank that can act as a regulatory banking organization. However, just like the fractional banking system, this system does not eliminate lending. However, it is able to create a long term view, of this concept of lending. Under the 100% reserve banking system, banking and investing are two different concepts (Quagliariello, 33). Banking does not have any risk, and does not have any gain, while investing, has some elements of risks, and gains.
In conclusion, the major different between the 100% reserve banking system, and the fractional system, is on what they do with the money from depositors. In the 100% system, this money is placed in the banking vaults, while in the fractional system, some of this money are kept in the banking vaults, and the rest are invested. However, one similarity is that they are involved in the lending services, but the degree and the method used varies.
Works Cited:
Top of Form
Quagliariello, Mario. Stress-testing the Banking System: Methodologies and Applications.
Cambridge, UK: Cambridge University Press, 2009. Internet resource.
Bottom of Form Read More
Cite this document
  • APA
  • MLA
(“Reserve Banking Essay Example | Topics and Well Written Essays - 500 words - 2”, n.d.)
Reserve Banking Essay Example | Topics and Well Written Essays - 500 words - 2. Retrieved from
(Reserve Banking Essay Example | Topics and Well Written Essays - 500 Words - 2)
Reserve Banking Essay Example | Topics and Well Written Essays - 500 Words - 2.
“Reserve Banking Essay Example | Topics and Well Written Essays - 500 Words - 2”, n.d.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document


Federal Reserve

...?Need of Federal Reserve for the US: Justification The Federal Reserve System is the central banking structure of US. The Federal Reserve was established in 1913 with the need of a central financial system in the economy of US. The central banking system was set up under a situation of continuous financial panics in the economy of US. The structure, roles and the responsibilities of the Federal Reserve has undergone rapid changes over the years which have been mainly stimulated by the events like the Great Depression, Global Financial Crisis, etc. The structure of the Federal Reserve System is composed of a governing...
5 Pages(1250 words)Essay

Money,banking and the federal reserve system

...Money, Banking and the Federal Reserve System Every world economy requires money to transact its operations. Money is a liquid asset applicable making transactions in acquisition of goods and services. There are several monetary forms present in the world today. The United States of America uses the monetary unit of a Dollar. The United States Treasury prints money bills for distribution to the banks in form of bank reserves. The banking system provides the platform for reserving money for distribution to the public. In order to ensure a balance of the bank reserves and to control the...
7 Pages(1750 words)Essay

Federal Reserve

...1a) the rate of Interest: This is one of the most basic approach by which the government regulates money supply in the economy. Ceteris Paribus, An increase in the rate of interest will make people save more and spend less because they think that their money is earning high rate of interest. Similarly, an increase in the money supply increases the cost of loans and people spend less. This reduces the money supply in the economy. Similarly, when interest rates decrease the exact opposite happens and money supply in the economy increases. 1b) Open-Market Operations: In this method, the sale and purchase by central bank in the security market has desired effect on the money supply in the economy. For e.g. an increase in the...
3 Pages(750 words)Essay

Federal Reserve

...system as it has today. The Federal Reserve was created in 1913 by Woodrow Wilson. In the late 19th and early 20th centuries credit was controlled entirely by private banks. Farmers in the mid-western regions grew increasingly upset by this fact, as they complained that oftentimes the banks would alter their credit options at times when the farmers were vulnerable. The Federal Reserve was created as a compromise, with the banks still controlling credit, but the government determining the supply of funds. While the intervening years have seen significant reforms in the way the Federal Reserve operates, its underlining function has...
2 Pages(500 words)Essay

Federal Reserve regulations of banking (SLP)

...Federal Reserve Regulations of Banking January 06, I chose Chase Bank because it is a large organization with many branches nationwide. Owned by JP Morgan, it is a bank offering individual and business services, online banking, mortgage and personal lending services and investment and retirement services. Chase Bank offers business credit cards, homeowner assistance and overdraft protection for your accounts. Chase is completely mobile with access online and also through your cellular and mobile phones. It is the job of the Federal Reserve to ensure that financial institutions are operating in a safe and responsible...
2 Pages(500 words)Admission/Application Essay

Federal Reserve

...Federal Reserve Factors That Influence the Federal Reserve in Adjusting the Discount Rate The Federal Reserve adjusts to the discount rate depending upon whether they want to encourage or discourage borrowings. In an inflationary and burgeoning economy the Federal would raise the discount rate so that economy calms down and vice versa (About.Com 2012). The Discount Rate Affect the Decisions of Banks in Setting Their Specific Interest Rates Discount rate affects the banks in setting their specific interest rates because that is the interest rate that they pay to the Fed for their borrowings from them. If the discount rates are moving up, the commercial...
1 Pages(250 words)Research Paper

Federal Reserve

...Federal Reserve Number: Introduction USA’s economy was faced by numerous issues/challenges during the spring (fromMarch up to May). Some of these challenges were inherited from the previous years particularly the famous 2008/2009 US economic crisis and federal reserves. However, by the beginning of 2012, the US economy was stable according to a report that was released by the Federal Reserve Bank of San Francisco on January 2012. The report was suggesting that the national economic activities were expanding at a modest rate with the economy characterized by high consumer spending habits, expansion of the manufacturing industry and growth in the tourism industry among...
2 Pages(500 words)Article

Federal Reserve

...Federal Reserve Federal Reserve Federal Reserve is all about a the US central bank that provide the US economy with a stable, flexible financial and monetary system. The Federal Reserve also supervises commercial banks and provides financial services to the US government (Tucker, 2011). San Francisco is the closest Federal District Bank that is close to me. In addition, the current Chairman of Fed is Janet Yellen who was sworn to office at Washington D.C (Brux, 2011) Fed should remain independent from political authority so that it can be in a position to effectively and efficiently control the levels of inflation....
1 Pages(250 words)Assignment

Federal reserve

...also affected global trade as it reduced the exports. High prices of oil in 2008 also led to cost-push inflation. This is because although there was a recession in Europe and the US. Oil was still in high demand and China and India. Consequently, oil prices did not lower (Pettinger 2013). Federal Reserve Policies Designed To Fix the Economy and Explain Why [And How] They Were Effective According to Thorton, the financial crisis began Rising in august 9, 2007 when BNP Paribas, France Largest bank stopped redeeming three investments funds. The Federal Reserve (Fed) reacted to this by announcing a discount window by reducing the interest rate by 50 basis points. The federal Open Market...
6 Pages(1500 words)Admission/Application Essay

Reserve Banking

...100% reserve banking with those of fractional reserve banking Fractional-reserve banking involves the practice where banks take up deposits and create credit facilities such as loans. Banks also use the same principle in holding reserves to satisfy withdrawal demands which are minimally the amounts of deposits from the customers. Reserves are taken within banks as currencies and the deposits have broader avenues of bank accounts within central bank (Daly and Farley 43). The fact that bank deposits are...
2 Pages(500 words)Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic Reserve Banking for FREE!

Contact Us