French entrepreneurs open a 100% reserve bank

Alright, I wasn’t planning to blog today but I suddenly got overexcited… I don’t know how I missed this news, as it’s been in the French media since June at least, but, well, I did miss it.

While the French government doesn’t like financial innovation, two French entrepreneurs just launched a 100% reserve bank… And this isn’t a tiny event. It’s reported everywhere in the media, for a simple reason: the bank’s cash and dealing machine will be located at the local…….tobacconist.

Yep, that’s right. We all knew that French people liked to smoke, but now, they will even be able to bank while buying cigarettes. A new revolution, I’m telling you.

This new bank is called ‘Compte Nickel’ and will open on the 1^st of January 2014, pushed by the national tobacconist federation. The website was launched today. How does it work? Well, it simply works like any 100% reserve bank: it’s some kind of safe in which you deposit your money. Tobacconists open for you a payment account and provide you with an associated debit card. You can transfer money, pay your bills, withdraw money all around Europe and get your salary paid in the account. It’s virtually like a normal bank current account/demand deposit.

What’s the difference then? A (fractional reserve) bank lends out the money deposited in it by its current account customers or invests it in liquid securities to generate interest income. It then often pays an interest on the account as a result and there is no or little charge to maintain the account. Interest rate is usually very low on demand deposits, and virtually non-existent in France. Compte Nickel on the other hand really acts like a safe: the money is not lent out nor invested anywhere. It is simply deposited in Compte Nickel’s Banque de France account.

Consequently, Compte Nickel does not lend. There is no overdraft allowed, no credit card and no credit facilities available. As I said, it is an electronic safe. As the bank still has operating expenses, customers will be charged to maintain the account. This cost is expected to be around EUR34 per year.

It will be a pretty interesting experience to see how people react to that new type of banking, especially given the well-developed anti-bank sentiment in France. 100000 people are expected to sign up during the first year.

If ever this is a successful experience that leads to full reserve banking becoming more widespread, it will raise other questions though: what happens to lending volume in a 100% reserve banking world? It would necessarily decline. I am not saying that this is necessarily a bad thing, and many authors, including Friedman, Rothbard and Fisher have considered the benefits of such a system. On the other hand, other authors (I’m mainly thinking about the so-called ‘Free Bankers’ here), have argued that every time a 100% reserve bank was set up, it always eventually became a fractional reserve one… They also argued that, given the choice between the two models, people would go for a fractional reserve bank. How would the monetary system respond to an increase in money demand? What happens to central banks’ monetary policy? Central banks aren’t required in a full-reserve world…

Banking theorists and historians, get ready!

Update: There might be a few reasons why such an account could indeed attract French customers. As I said above, anti-bank sentiment is one. Many French people think that banks are casinos playing with their money. A second one is that French people already pay a lot of banking charges. French law actually prevented banks to pay interest on current accounts until 2005. There have traditionally been a lot of charges to maintain a current account as a result, which have not disappeared. Yes, once again another regulatory distortion… Therefore, it might not bother customers to be charged for a full reserve bank account (and it does look like normal banks charge more than Compte Nickel!). A simple reason why such a bank might take a while to take off is…. that French customers are often quite conservative and want proven business models.

Photograph: PFG/SIPA