Lowering the bank’s reserve to zero is really terrifying. It poses a great risk to the clients money deposited in the bank.
When we talk about zero bank reserve requirement, it means that the bank can produce money infinitely and lend it to whoever needs it. It may sound a very nice to the ears, as it can support the economy of a country, but it comes with a high consequence.
This is exactly one of the misconceptions I mentioned above.
Banks must stay liquid to operate. This means, if they lend money to "anyone", also those who don't present them proper backing/security, they risk that the loans are not paid back, and that they become illiquid and go bankrupt. Normally, this simple mechanism prevents banks to lend money to "anyone".
The problem is on two fronts:
- Errors in risk management - this led to the crisis 2007-09, because some financial products which should have been rated like trash were rated almost like state-backed bonds. Laws since then have been revised to prevent that problem. I doubt however it can be solved entirely.
- the "too big too fail" problem - if a bank is big enough it can speculate on the State always trying to save it from liquidity problems.
None of these problems can be solved directly by a mandatory central bank money reserve of 1% or even 10%. As I wrote above, a reserve requirement of 1% like in the Eurozone does not affect the loan activity of a bank at all. The 10% in the US was only valid for big banks, smaller banks had 3%. A 50% or 100% reserve would solve the problem perhaps, but lead to a ton of other problems (it would basically be a way back to a centrally planned economy, and thus extremely inefficient).
I see current banking as problematic, but not because they "can create money out of thin air", but more because of their weight in the financial system which could be much lower if Bitcoin and other cryptocurrencies were used instead of fiat. They're a sector of economy that is a bit like a circlejerk, and not really necessary (at least not in the current size). Thus I'm looking for
ways to make Bitcoin an alternative to banks.