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A Critical Analysis of Fractional Reserve Banking with Regard to Regulatory Arbitrage

The concept of a fractional reserve to be retained in any bank or lending institution is as old as money lending itself. The practical necessity of being able to maintain liquidity in terms of covering withdrawals was well understood by the early Jewish money lenders of renaissance Italian states. The statement '1 would rather the worst debtor were indebted to me, than I to the best of creditors"is a saying still well known today amongst certain communities (Feldman, 2011). This paper will thus first examine the history of fractional reserve banking. Second explain the organisations currently operating in this field, including the Basel 1, 2, and 3 accords which have been developed as a result of continual problems. Third, it will explore the scope and inclusiveness of international organisations and agreements in regard to their efficacy. Finally conclusions will be drawn, and a formula derived, to calculate appropriate financial penalties for transgression. Lastly recommendations will be made for an effective enforcement system for a given fractional reserve.