Reserve Banking Essay Example | Topics and Well Written Essays - 500 words - 2

Reserve Banking - Essay Example There are two types of banking system that is the fractional banking system, and the 100% reserve banking system. This paper is a comparison and a contrast of these two types of banking system. The 100% reserve banking system is a practice whereby the full amounts of the funds of a depositor are made available to him or her at any given time. In the current global business environment, this system of banking does not exist. This is ever since the 1800s. The major reason is because banking organizations need to make profits, and having a 100% reserve banking system makes it difficult for these organizations to make money (Quagliariello, 17). Therefore, banking organizations and institutions would trade with the deposits in their vaults, for purposes of making profits. These trades involves, issuing of loans, mortgages, and involving themselves in the money market. However, in order to make some money, banking organizations that operates under a 100% reserve banking system, are involved in charging their customers some money, just for purposes of making them to be able to access their services. Lending in this kind of a system normally occurs when there is a separate arrangement, between the depositor and the banking organization, where the depositor is required to authorize the banking organization to lend some of his or her money. This is in direct contrast to the fractional system of reserve banking (Quagliariello, 27). Under this type of banking system, only a fraction of the depositor’s money is able to stay in the banking vaults, and the rest of the rest of the money are used for purposes of trade. Banks normally loan out these money, at an interest. Banks normally carry out this activity, through a vehicle referred to as a certificate of deposit. This system normally works, when the banking organization takes the money that is not needed by the customer, and it