Economic Strategy

Economic Strategy

Comparison between the effect of full and fractional reserve banking on the Iran's banking system's health : A game theoretic approach

Document Type : Original Article

Authors
1 Professor of the Islamic economics, Faculty of Economics, Tehran University, Tehran, Iran
2 PhD student in Faculty of Economics, Tehran University, Tehran, Iran
Abstract
Currently, Iran's banking system, as the main financing system of enterprises, doesn't have sufficient health. For example the NPLs in the banking system is 7.1%, and less than half of the banks satisfy the minimum capital adequacy ratio of 8%. But the central bank tolerates this situation and does not bankrupt them. Knowing this issue has caused banks not to pay enough attention to the managing the risks of lending and as a result has reduced the health of the banking system. It seems that the main reason for the central bank's forbearance is to prevent bank runs. In order to deal with this dilemma, full reserve banking can eliminate the possibility of bank run and therefore remove the main cause of central bank's passiveness. The latter improves the health of the banking system. In this research, the partial and full reserve banking system have been modeled using game theory. Results show that migration to the full reserve banking system can improve the health of the banking system in Iran and reduce various risks such as credit and liquidity risk.
Keywords

Allais, M. (1987). ‘The Credit Mechanism and Its Implications’, in Feiwel, G. (ed.): Arrow and the Foundations of the Theory of Economic Policy. New York, NY: New York University Press.
Angell, J. (1935). The 100 Per Cent Reserve Plan. Quarterly Journal of Economics, (50), 1-35.
Benes, J. & Kumhof, M. (2012). The Chicago Plan Revisited. IMF Working Paper No. 12/202.
Benes, J. & Kumhof, M. (2013). The Chicago Plan Revisited. Revised Draft, 12 February.
Chari, V.V. & Phelan, Christopher (2014). On the social usefulness of fractional reserve banking. Journal of Monetary Economics, (65), 1–13.
Chiarella, C.; Flaschel, P.; Hartmann, F. & Proaño, C. (2011). Stock Market Booms, Endogenous Credit Creation and the Implications of Broad and Narrow Banking for Macroeconomic Stability. New School for Social Research, Working Paper No. 7/2011.
Cochrane, J. (2014). Toward a run-free financial system. Working Paper, available at: http://faculty.chicagobooth.edu/john.cochrane/research/ papers/run_free.pdf [Accessed 7 September 2015].
Currie, L. (1934). A Proposed Revision of the Monetary System of the United States in The Supply and Control of Money in the United States. Cambridge, MA: Harvard University Press [Reprinted in 1968 by Russell and Russell, New York].
Douglas, P. (1935). Controlling Depressions. New York: NY: W.W. Norton and Co.
Egmond, N. D. van & Vries, B. J. M. de (2015). Dynamics of a sustainable financial-economic system. Sustainable Finance Lab, Working Paper, March 2015.
Fisher, I. (1935). 100% Money. New York: NY: Adelphi Company.
Flaschel, P.; Hartmann, F.; Malikane, C. & Semmler, W. (2010). Broad Banking, Financial Markets and the Return of the Narrow Banking Idea. Journal of Economic Asymmetries, 7(2), 105-137.
Fratianni, Michele & Savona, Paolo (2017). Una proposta per tagliare il debito pubblico e riformare le banche. Milano Finanza 11 February 2017.
Friedman, M. (1948). A Monetary and Fiscal Framework for Economic Stability. American Economic Review, 38(3), 245-264.
Friedman, M. (1960). A Program for Monetary Stability. New York: NY: Fordham University Press.
Graham, F. (1936). Partial Reserve Money and the 100 Per Cent Proposal. American Economic Review 26 (September), pp. 428-440.
Hart, A. (1935). The “Chicago Plan” for Banking Reform. Review of Economic Studies, February, 104-116.
Hayek, F. (1937). Monetary Nationalism and International Stability. London: Longman.
Higgins, B. (1941). Comments on 100 % Money. American Economic Review 31 (March), pp. 91-96.
Huber, J. & Robertson, J. (2000). Creating New Money: A Monetary Reform for the Information Age. London: New Economics Foundation
Huerta de Soto, J. (2009). Money, Bank Credit, and Economic Cycles. Second Edition. Translated by Stroup, Melinda. Auburn, Alabama: Ludwig von Mises Institute.
Hülsmann, J. G. (2003). Has fractional-reserve banking really passed the market test?. The Independent Review, 7(3), 399-422.
Jackson, A. & Dyson, B. (2012). Modernising Money: Why Our Monetary System is Broken and How It Can Be Fixed. London: Positive Money.
King, Mervyn (2016). The End of Alchemy: Money, Banking, and the Future of the Global Economy. New York: NY: W.W. Norton & Company.
Knight, F.; Cox, G.; Director, A.; Douglas, P.; Hart, A.; Mints, L.; Schultz, H. & Simons, H. (1933). Memorandum on Banking Reform. Franklin D. Roosevelt Presidential Library, President’s Personal File 431, March 1933. [Reproduced in Phillips, R. (1994). The Chicago Plan & New Deal Banking Reform. Armonk, NY: M.E. Sharpe, pp. 191-199.]
Krainer, R. E. (2013). Towards a program for financial stability. Journal of Economic Behavior & Organization, (85), 207-218.
Krainer, Robert (2015). Economic Stability under Alternative Banking Systems. Working Paper, 25 November 2015.
Lainà, P. (2019). Money creation under full-reserve banking: a stock–flow consistent model. Cambridge Journal of Economics, 43(5), 1219-1249.
Lainà, Patrizio (2015b). Money Creation Under Full-Reserve Banking: A Stock-Flow Consistent Model. Levy Economics Institute Working Paper, (851), October 2015.
Mints, L. (1950). Monetary Policy for a Competitive Society. New York: McGraw-Hill.
Mises, L. von (1912). Theorie des Geldes und der Umlaufsmittel. Munich and Leipzig: Duncker and Humblot. [Published in English in 1980 as The Theory of Money and Credit. Translated by H.E. Batson. Indianapolis, IN: Liberty Classics.]
Musgrave, R. S. (2013). Removing bank subsidies leads inexorably to full reserve banking.
Phillips, R. (1994a). The Chicago Plan & New Deal Banking Reform. Armonk, NY: M.E. Sharpe.
Prescott, Edward & Wessel, Ryan (2016). Monetary Policy with 100 Percent Reserve Banking: An Exploration. Federal Reserve Bank of Minneapolis, Staff Report No. 530, June 2016.
Ricardo, D. (1824). ‘Plan for the Establishment of a National Bank’ reprinted in Ricardo, David (1951): The Works and Correspondence of David Ricardo. Volume 4: Pamphlets and Papers 1815-1823. Cambridge: Cambridge University Press.
Simons, H. (1948). Economic Policy for a Free Society. Chicago: University of Chicago Press.
Simons, H.; Cox, G.; Director, A.; Douglas, P.; Hart, A.; Knight, F.; Mints, L. & Schultz, H. (1933). Banking and currency reform. Manuscript. [Reprinted in Samuels, Warren (ed.). (1990). Research in the History of Economic Thought and Methodology. Archival Supplement, Volume 4. Greenwich, CT: JAI Press.]
Soddy, F. (1926). Wealth, Virtual Wealth and Debt: The Solution of the Economic Paradox. London: George Allen & Unwin.
Suntum, Ulrich van & Neugebauer, Tom (2015). Vollgeld, Public Debt, and the Natural Rate of Interest. Centrum für Angewandte Wirtschaftsforschung Münster, Working Paper, Revised June 2015.
Tobin, J. (1985). Financial Innovation and Deregulation in Perspective. Bank of Japan Monetary and Economic Studies, 3(2), 19-29.
Tobin, J. (1987). The Case for Preserving Regulatory Distinctions in Federal Reserve Bank of Kansas City (ed.): Restructuring the Financial System. Kansas City: Federal Reserve Bank of Kansas City, 167-183.
Whittlesey, C. (1935). Banking and the New Deal. Public Policy Pamphlet No. 16. Chicago: University of Chicago Press.
Wolf, M. (2014b). The Shifts and the Shocks: What We’ve Learned and Have Still to Learn-from the Financial Crisis. London: Penguin Books.
Yamaguchi, K. & Yamaguchi, Y. (2016). Head and Tail of Money Creation and its System Design Failures. JFRC Working Paper No. 01-2016.
Yamaguchi, K. (2010). On the Liquidation of Government Debt under a Debt-Free Money System: Modelling the American Monetary Act. Paper Presented at the 28th International Conference of the System Dynamics Society in Seoul, Korea, 26 July.
Yamaguchi, K. (2011). Workings of a Public Money System of Open Macroeconomies: Modelling the American Monetary Act Completed. Paper Presented at the 7th Annual AMI Monetary Reform Conference in Chicago, USA, 30 September.
Yamaguchi, K. (2014). Money and Macroeconomic Dynamics: Accounting System Dynamics Approach. Second Edition. Awaji Island, Japan: Japan Futures Research Center.

  • Receive Date 21 June 2023
  • Revise Date 26 November 2023
  • Accept Date 25 December 2023