Full-reserve banking
Full-reserve banking is a banking practice in which all currency circulating in a financial system is backed up by an asset that is generally considered to be a stable store of value. This implies that there is a government body (such as a central bank) that will convert currency to a more stable type of asset if requested to do so. And further, the resources available to the central bank (and commercial banks) is sufficient to convert all currency if so required.
The cash reserve ratio of all banks operating in such a system is 100% making the deposit multiplier equal to zero and the commercial banks' propensity to loan very low.
A system in which all currency is backed by another asset and
commercial banks are required to maintain a 100% cash reserve ratio has never been implemented in any actual economy. The closest system is that of a currency board, in which commercial banks are not required to maintain a 100% cash reserve, but all of the money in circulation is backed by another asset held by the central bank. This system is in use in Hong Kong where the Hong Kong dollar is backed by United States dollars deposited in the Exchange Fund of the currency board.
See also: fractional-reserve banking.
Referenced By
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