House of Debt's recent piece on full reserve banking opens with the following line.
"So both John Cochrane and Martin Wolf are advocating 100% reserve banking."
I found this interesting, not so much for the idea of the same proposal coming from rather different sources, as for the differences in their approach.
Wolf's article describes the system proposed by Positive Money (PM). This involves strictly limiting bank deposits to two types, effectively transactions accounts and savings accounts. Banks would have to hold 100% reserves against the balance of transaction accounts. Savings accounts, being all bank accounts that are not transaction accounts, would then have to have a minimum notice period of, say, a month.
By requiring banks to hold reserves in full cover of their demand liabilities, it is intended that this structure would reduce the risk of bank runs. A bank could still find itself unable to repay savings accounts when they fell due, but because of the notice period on such accounts, it is hoped that this risk would be easier for the central bank to manage. It should be noted that the proposal would not prevent additional liquidity requirements applying to savings accounts, such as the BIS Liquidity Coverage Ratio.
Because of the 100% reserve requirement against transaction accounts, additional lending by banks would deplete their liquid asset holdings. As they would be constrained by the need to maintain minimum liquidity levels, additional lending would have to wait until the liquid assets get redeposited again. The intention is that this would slow up the pace of credit creation.
So it's not unreasonable to refer to this proposal as 100% reserve banking. However, it is important to recognise that the full reserve requirement is only proposed for transaction accounts. This differs from, for example, the full reserve proposal of Benes and Kumhof.
Reserves appear on the asset side of the bank's balance sheet. John Cochrane focuses on the liability side. His concern is with what he calls run-prone liabilities. This is principally short term fixed value debt, but he also worries that longer term liabilities can still be problematic. He would like to see an incentive system that pushes financial institutions (he does not treat banks as special here) towards drawing a greater portion of their funding in the form of capital. As he sees it, the problem is the extent of funding taken in the form of fixed value liabilities that are shorter in term than the underlying assets and the solution is to reduce this. This proposal has some similarities to the Limited Purpose Banking concept of Chamley, Kotlikoff and Polemarchakis.
So, in a sense there is quite a big difference between Cochrane's proposal and that of PM. Cochrane says little about reserves and is instead concerned with bank capitalisation. It's not clear that this is really 100% reserve banking at all. In PM's proposal, on the other hand, reserves play a central role; they are less concerned about the capital structure of the intermediation aspect of banking.
One of the interesting differences between the proposals, I think, is in the way they conceive of money. Cochrane sees much less of a need for fixed value liabilities in the future. He describes how technology substantially changes the requirement for conventional transactional account balances.
"With today's technology, you could buy a cup of coffee by swiping a card or tapping a cell phone, selling two dollars and fifty cents of an S&P 500 fund, and crediting the coffee seller's two dollars and fifty cents mortgage-backed security fund."
This is a world with payments and balances, but where the division between money and non-money is less clear. This fits quite well with my own way of looking at things. PM's concept of money is rather more conventional and their analysis relies on a clearer concept of what constitutes money.
Yet, despite the differences, there is clearly a common theme in reducing the mismatch in bank balance sheets. The concept appears to be attracting support from a variety of commentators. If anything does come of it, it will likely be a watered down version, but it will be interesting to see where it goes.