Fractional Reserve in Banking System

Bachelor thesis English OPEN
Valkonen, Maria (2016)
  • Publisher: Haaga-Helia ammattikorkeakoulu

This thesis is aimed to provide understanding of the role of the fractional reserve in the mod-ern banking system worldwide and particularly in Finland. The fractional reserve banking is used worldwide, but the benefits of this system are very disputable. On the one hand, experts say that the fractional reserve is a necessary instrument for the normal business and profit making. On the other hand, sceptics openly criticize the fractional reserve system and blame it for fiat money (money not backed by any physical commodities) creation. According to a third point of view, which is expressed by conspiracy theory followers, a the fractional reserve system primary targets to control the money supply in favor of famous rich families, such as the Rothschild family. Although the fractional reserve system is criticized for many reasons, such as causing a moral hazard, cheating and being not transparent, it still functions successfully all over the world. At least the banking system still exists and seems to exist further. How crucial are the defi-ciencies in the fractional reserve system for which it is criticized? Can they be improved? Or maybe the fractional reserve system is not that up to date anymore and should be replaced by something totally different? To find answers to these questions, I studied history books, up-to-date materials and legisla-tion, especially acts published by the European Central Bank. In addition, I sent questionnaires to several banks in Finland and got examples from real bank practice, which in total helped me to form the final understanding of the role of the fractional reserve system in today’s economy.
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