Page "Full-reserve banking" Paragraph 10

The most common criticism of full-reserve banking, and by contrast, argument for fractional reserve banking, is the need for financial intermediation.

Small savers often cannot lend or invest their meager savings, for want of knowledge and sufficient capital to make a loan.

Likewise, without financial intermediaries, borrowers must seek out someone who can loan them the exact amount they need, instead of being able to draw on several loans from different small savers.

Savers also face significant risk as individual investors, since if they lend to a single firm or individual, that entity can collapse, with the savers having lost the money they lent.

Furthermore, if they act as individual lenders, savers must wait for their loans to mature before recouping their money ; a bank can make their deposits available at any time.

There are also significant economies of scale in banks making investment and lending decisions, as they have access to knowledge and expertise which individual investors or lenders generally do not.

Under full-reserve banking, a great deal of money would sit idle, as savers stored up their money, while entrepreneurs went without much-needed capital.