[PragmaticPulp]

> Imagine you were designing the bank from scratch having no knowledge of the current banking system. How would you do it? The most obvious thing would be if a customer deposits money, you would hold 100% of the money 1 to 1 exactly how they deposited it. Then the bank could make money by providing services to their customers.

Now imagine you've finally settled on a cost structure that can pay all of your insurance, operating costs, payroll, and everything else. You charge monthly fees and you might also charge per-interaction fees to do anything or talk to anyone.

Then a competitor comes along that operates in a fractional reserve manner. They not only offer zero fees, they actually pay customers interest to keep their money in the bank. There is a risk of failure, but it's rare and all evidence points to customers not suffering massive losses when it does happen due to various regulations. Inconvenient, yes, but it's unlikely that you're going to lose all of your money.

The majority of your customers would leave for the competitor bank.

[stuxnet79]

I see the point you are trying to make here but your argument isn't very convincing. You are completely ignoring the impact regulatory oversight would have. If fractional reserve banking was banned outright due to the risks it poses, then the situation you just described would never emerge.

As time goes on it's becoming more obvious that the current status quo is unstable. Our financial institutions regularly engage in ponzi like activities and we've become accustomed to near catastrophic collapse at the end of every business cycle.

If we are going to stick to fractional reserve banking then we need to come up with better reasons why otherwise I feel like the entire system needs to be reevaluated.

[chii]

> then we need to come up with better reasons

the best reason is to allow more risks to be taken.

A 100% reserve system means that a bank would not be able to make loans that they'd want to make (aka, a customer wants the loan, and they can service it, etc).

A 100% reserve system would seize up at a small shock much more easily than a <100% reserve system. The reason is that if a bank required 100% reserves, they would not lend money (even to another bank), even if the lending would've been profitable. This means a bank must standalone on an island, rather than as an inter-connected network with other banks.

You pay for <100% fractional reserve system with some risk of bank runs. If the majority of people can get a gov't backed guarantee that they would be made whole, these runs tend to be minor or not happen at all. And overall economic activity is smoother due to more liquidity available to lubricate everything (e.g., it's easier to get loans to do things to provide more economic activity).

[AvAurora]

Not if you make inducing bank runs by means of marketing legal.

[adrr]

Also where would the capital come from to give out loans?