Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Playing safe with 100 per cent reserve banking

The term 100 per cent reserve banking refers to a situation in which banks keep all the money that people deposit with them safely in reserve. Therefore, it’s the opposite of fractional reserve banking, where banks only keep some fraction of deposits in reserve (we take a detailed look at fractional reserve banking in Chapter 14). People who argue for 100 per cent reserve banking used to be seen as crazies, but now some serious economic thinkers have started to talk about it as a possibility.

Here are the pros and cons of 100 per cent reserve banking:


Advantages: No more bank runs and no need for government bailouts. For every £1 deposited at the bank, the bank would hold exactly £1 in reserve, so that whenever you wanted to withdraw your money, it would be waiting for you.


Disadvantages: Banks would be little more than safe places to keep your money. Having a bank account would probably cost quite a bit of money

– how else would the bank make any money from depositors? Banks would also not be able to act as an intermediary between savers and borrowers.

A halfway house would be that banks offer two types of account:

A 100 per cent reserve account that people pay to use: This option is a bit like paying to use a bank’s safety deposit box. The advantage is that (in theory) you’d never lose your money.


A risky account where only a fraction is held in reserve: People get ‘free’ banking services and maybe even some return on their savings. The bank can then use some of their money to lend to people who want to borrow. The downside is that if the bank goes under, customers may lose everything!

In reality, 100 per cent reserve banking is nowhere on the horizon at the moment; although it is no longer seen as just the preserve of crazies. Who knows? If another major financial crisis hits, the calls for some kind of 100 per cent reserve banking will only get louder.