Pure Bank

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

A pure bank performs the following functions:

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

The above three functions are the full makeup of the pure bank. It does not have access to state banking services, nor is it subject to state regulatory controls. Its only capital is money borrowed or obtained as interest on credit issued. It allocates money as interest to its creditors. It sets its own reserve ratio and interest rates based on its own preference. The terms of credit and debt are determined by contractual agreement with its counterparties. All contracts are understood and agreed by all parties. It has no infrastructure and no employees. It does not earn, steal, lose or destroy any money. No type of contract is assumed, all terms are possible. All parties fully comply with the terms of their contractual obligations. A scenario that implies an inability for the pure bank to comply with its terms indicates bank failure.

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