Pure Bank

The concept of a pure bank can be useful in demonstrating behavior of lending generally.

A pure bank provides only the following services:

• borrows money (debt from creditors)
• lends money (credit from debtors)
• hoards money (reserve)

The material differences from a real bank are:

• no state intervention (free bank)
• uniform interest (efficient market)
• no cost of operation (efficient operations)

The bank is owned by its creditors in proportion to their credit, as is the case with any company. There are existing major banks that are owned by their account-holders, such as USAA and Vanguard, so this is not a distinction from a real bank. The objective of creditors (owners) is to maximize their income. The objective of debtors is to minimize their cost. Creditor accounts are money substitutes.

The lack of state intervention is the common concept of free banking, where there is no statutory control, no state insurance, no discount capital, and no seigniorage. The bank uses commodity money unless otherwise specified, which simplifies calculations by eliminating the need to offset price inflation or price deflation using the Fisher Equation.

Perfect operational efficiency differs from a real bank only in the amount returned to owners, as nothing is consumed in operations. A perfectly efficient market implies uniform interest, and that all returns are a consequence of time preference. This is not a material distinction from a real bank, as the extent to which interest rates are not uniform, the error is not predictable.

reserved = deposited - loaned
depreciation = interest-rate * reserved
earned-interest = interest-rate * loaned
paid-interest = interest-rate * (2 * loaned - deposited)

Reserve Ratio

reserve-ratio = reserved / deposited
reserve-ratio = (deposited - loaned) / deposited

Capital Ratio

capital-ratio = reserved/loaned
capital-ratio = (deposited - loaned) / loaned