[GJM] Which Types of Banks do not use "Fractional Reserve Banking?"

[Peter Hogwood]

"Few people appreciate that the value actually
provided by Banks is that of a guarantee of borrowers'
credit, but that is the fact of it."
--------------------------------------------------------

This is at best an oversimplification, Chris.  Banks
do not simply "guarantee" or "endorse" borrowers'
credit, but exchange their fungible credit in the form
of bank deposits for the individualized promissory
notes of their borrowers.  While there is indeed a
secondary market for these promissory notes among
investors, they do not function as money in
facilitating trade and commerce, as do bank deposits. 
This secondary market does nothing to accommodate
production and consumption.

I fail to see how your "peer to peer" conception would
accommodate production and consumption in the
industrialized economy.

I also fail to see how "peer to peer" loans could be
competitive, either to lender or borrower, in
comparison to bank loans, which operate actuarially
under the principle of the pooling of resources and
the sharing of risks.  It is this actuarial principle
that is absent in "peer to peer".  The lenders and
borrowers in "peer to peer" have no reasonable basis
to assess actual risk and prospect for gain.  Absent
the actuarial insurance net, lenders in "peer to peer"
would have to charge significantly higher interest
rates than banks for similar loans.  That they may not
is indicative of their ignorance of the principles of
economics.  I am certain that catastrophic loss to
lenders is commonplace in the "peer to peer" world.

Peter 



--- chris cook <cojock at hotmail.com> wrote:

> 
> Robert
> 
> It is necessary to distinguish between deposit
> taking institutions - such as Credit Unions - which
> do not create Credit on the basis of an amount of
> regulatory Capital, and "Credit Institutions", which
> do.
> 
> It is this latter activity of credit creation which
> is known as "Fractional Reserve Banking".
> 
> JAK Bank of Sweden is, as I understand it, a deposit
> taking institution. So called Islamic Banks are not.
> They create credit in best Fractional Reserve style.
> The difference with conventional Banks is that
> Islamic Banks claim to (and sometimes actually do )
> "invest" (rather than lend) the money they have have
> created. Such investments give rise to issues with
> regulators in relation to the amount of Capital they
> must set aside to cover them.
> 
> Yunus' Grameen Bank is a conventional Credit
> Institution as far as I know, albeit with an
> enlightened policy to defaults (ie it doesn't chase
> defaulters, but in any case, has few defaults
> because loans are always guaranteed by relatives or
> friends of the borrower).
> 
> Yunus certainly had starting capital which was
> indeed lent to begin with, but if and when this
> "morphed" into capital supporting conventional
> credit creation, I do not know.
> 
> You may be interested in this 
> 
>
http://www.atimes.com/atimes/Global_Economy/JD03Dj04.html
> 
> recent article of mine on Peak Credit, published in
> Asia Times. 
> 
> Few people appreciate that the value actually
> provided by Banks is that of a guarnatee of
> borrowers' credit, but that is the fact of it. I
> have already been approached by two investment banks
> in respect of it, both with big portfolios of
> subprime debt.
> 
> I have ceased to attack the practice of banking on
> moral or ethical grounds: I simply observe that
> credit intermediaries, like all other intermediaries
> in a "Peer to Peer" world, are simply redundant, and
> will either transform to a future as service
> providers, or simply wither on the vine.
> 
> Best Regards
> 
> Chris
> 
> 
> 
> 
> 
> > Date: Fri, 2 May 2008 19:12:46 +0100
> > From: dharao4 at yahoo.co.uk
> > To: discussion at globaljusticemovement.net
> > Subject: [GJM] Which Types of Banks do not use
> "Fractional Reserve Banking?"
> > 
> > 
> > Dear All,
> > 
> >      I expect Chris Cook would be able to answer
> this
> > question, and if possible list the type of banks
> > involved (hopefully). Though most commercial banks
> > create money out of thin air there are a tiny
> minority
> > which do not. In other words, they may actually
> use
> > existing money deposited with them. I believe
> rightly,
> > or wrongly this is true of Credit Unions.
> > 
> > I also recall how Muhammad Yunnus set up his first
> > bank to help the poor. He seem to indicate that he
> had
> > some starting capital which could be lent, and
> paid
> > back with interest ofcourse. He did not have it
> > created out of thin air. Again light on this would
> be
> > gratefully acknowledged with thanks.
> > 
> > Robert Searle.
> > 
> > 


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