Deposit or loan? (A Law-and-Economics Critique of Fractional-Reserve Banking, Fiduciary Media, and Systemic Risk)

Abstract This article advances a law-and-economics critique of fractional-reserve banking, focusing on the legal taxonomy of bank contracts and the risk externalities of maturity transformation. We argue that the conflation of custody-like deposits with mutuum loans blurs property-rights boundaries and weakens liability discipline. Drawing on Austrian monetary theory, we link fiduciary media and demandable debt to pro-cyclical liquidity, run dynamics and the amplification of systemic risk. We reassess the real-bills doctrine and “demand loans,” showing why they do not neutralise run risk in practice and may obscure solvency–liquidity interactions. We then outline institutional reforms – 100%-reserve custodial deposits and a strict functional separation between custody and intermediation – together with market-based loss allocation. The article concludes with regulatory implications for lender-of-last-resort, deposit insurance, and capital/liquidity regimes consistent with risk reduction and legal coherence.