The Legitimacy of Loan Maturity Mismatching: A Risky, But Not Fraudulent, Undertaking

Bagus, Philipp and Howden, David (2009): The Legitimacy of Loan Maturity Mismatching: A Risky, But Not Fraudulent, Undertaking. Published in: The Journal of Business Ethics , Vol. 3, No. 90 (2009): pp. 399-406.

Abstract

Barnett and Block (2008) attack the heart of modern banking by claiming that the practice of borrowing short and lending long is illicit. While their claim of illegitimacy concerning fractional reserve banking can be defended, their justification lacks substance. Their claim is herein strengthened by a legal analysis of deposits and loans based on Huerta de Soto (2006). A combined legal and economic analysis shows that while lending deposits can be regarded as illicit, the maturity mismatching of loans is legitimate contrary to Barnett and Block's claim. No over-issuance of property rights is involved with this practice once the distinction between present and future goods is taken into account. However, while the practice is not illicit per se, it is greatly assisted and developed through the presence of a fractional reserve banking system, and can sometimes breed detrimental effects.

• Item Type: MPRA Paper
• Language: English
• Keywords: Time deposits, private property rights, fraud, maturity mismatching, fractional reserve banking
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E20 - General; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E59 - Other; P - Economic Systems > P1 - Capitalist Systems > P16 - Political Economy

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