[a008t]

You are right - this will be a strong incentive to keep as little as possible in a checking account, and either lend or invest the rest. There are two main differences from the current system:

1. Depositors will have to explicitly give up/lock their funds for a set period of time if the funds are to be lent out and they are to earn interest. Early withdrawals come with a significant fee. This makes bank runs very unlikely, eliminating the need for a central bank. The longer you want to lend the money for, the higher the interest. But you can also lend money overnight.

2. No money creation, leading to proper alignment of time preferences of investors/consumers and businesses. Interest rates correctly reflect this time preference. If money represents a claim on real resources, then a business can only use as many of these resources for investment as consumers are willing to forego consuming. Interest rates reflect the actual supply and demand of resources/consumption at different time horizons and do not get artificially "set" or otherwise manipulated.

Because of these two properties, the boom-bust leverage cycle is greatly dampened, if not completely eliminated.

[notahacker]

An alternative way of putting it is that

(1) Because maturity transformation is no longer permitted, every time somebody wishes to take out, say, a mortgage, the bank has to find somebody who has >$200k they're not even going to consider spending for quarter of a century. As a result, costs of borrowing go massively up, which is bad for everybody except for a small proportion of rentiers sufficiently wealthy to be entirely unworried by liquidity. Joe Sixpack proves to be even less adept at managing an overnight lending portfolio than full time professional bankers, and loses money as a result.

(2) The money supply is artificially "set" at a particular level on the basis of the unambiguously false assumption that real resources do not change over time rather than being allowed to fluctuate and grow to properly align itself with creditworthy borrowers' growth projections in a way commensurate with price stability. The boom bust cycle is replaced by permanent bust.

[a008t]

1. Could maturity transformation not be done by the markets? E.g. if you want a mortgage, you essentially issue a bond; lenders may then decide to hold the bond for a short period of time and then sell it on the secondary market. With regards to consumer products, I am sure the market would come up with something user-friendly. But I see your point.

2. The money supply could grow predictably, e.g. like Friedman's proposal of replacing the Fed with a computer that expands the money supply in a predictable manner.

[notahacker]

1. Banks are a market solution to maturity transformation (it's just that doing maturity transformation without frequent liquidity crises needs access to more short term borrowing facilities than private capital markets can offer). Treating mortgages as tradable financial products instead of obligations the issuer should be happy to keep on their balance sheet was the cause of the bad underwriting that led to the financial crisis, not the solution to it.

2. Friedman's k% rule is better than a fixed money supply, but it's still every bit as arbitrary and further removed from the relevant market indicators of resource constraints (creditworthy borrower demand and price inflation) than the current system.