Negative Interest Rate

Since all businesses must make a profit to survive, a bank’s ability to make a profit sets its ability to stay in business. Modern, fractional reserve banks make their profits in a multitude of ways: fees, profits from investing people’s deposits, and other collections they receive. Since a fractional reserve bank makes its profits from investments by using other people’s money (even without them knowing it), I don’t believe it is a moral profit.

A full reserve bank, on the other hand, is not allowed to use your deposits to make itself money, without your approval and commitment to also taking a risk. If you deposit US$10,000 in a full reserve bank, the bank has to be able to pay you your US$10,000 on demand, as well as all other depositors if they want their money as well. A fractional reserve bank would have to borrow money from other banks, or the Federal Reserve, if everyone wanted their money — a fractional reserve bank doesn’t have to actually save your money from loss.

Because a full reserve bank doesn’t have access to your money, it would have to find other ways to stay in business and pay the overhead of labor, utilities, property costs, and transaction costs. Most full reserve banks, theoretically, would utilize a combination of transaction fees, as well as a negative interest rate.

A negative interest rate is defined as the amount a depositor pays in exchange for purely securing their deposit. If a bank charged 0.5% negative interest a year (compounded daily, let’s say), they would take 0.5% of your deposit over a year to pay for the cost of securing your deposit, insuring it against theft or damage. This is generally cheaper than the risk of hoarding your own deposit (be it in dollars, commodities or other assets). Competitive pressures would keep the negative interest rate as close to zero as possible, and a bank that makes a decent profit on their transaction fees might be able to offset the negative interest rate or even remove it entirely for people who use the bank for transactions regularly. The transaction fee would be a charge for either the act of depositing your money, or the act of redeeming your money.

For more information on how a transaction fee works, see this article: What is a reserve?