Full-Reserve Banking

The current form of banking practiced in most countries worldwide is called fractional-reserve banking and can be simply described as the common practice by commercial banks of accepting deposits, and making loans or investments, while holding reserves at least equal to a fraction of the bank’s deposit liabilities. Reserves are held as currency in the bank, or as balances in the bank’s accounts at the central bank.

Full-reserve banking (also known as 100% reserve banking) is the alternative to fractional-reserve banking in which banks are required to keep the full amount of each depositor’s funds in cash and cash equivalent instruments, ready for immediate withdrawal on demand.

Zenus has strategically adopted the full-reserve banking model where funds deposited by customers would not be loaned out by the bank because it would be required to retain the full deposit to satisfy potential demand for payments. Currently, no country in the world requires full-reserve banking. Contrast this with a fractional-reserve bank, which invests its depositors’ funds in riskier, non-zero-maturity assets, say loans, while only keeping a small amount of zero-maturity assets as a reserve. To engage in this activity, fractional-reserve banks have to hire a host of extra employees, including credit evaluators, liquidity managers, and investment analysts.

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