Lessons on Fractional Reserve Banking From 15th Century Italy – Featured Bitcoin News

Amid the banking chaos of the 21st century, some are looking back more than 600 years ago, to the Medici Bank — one of the most powerful banks of its time. It established its business and became one of the most respected banks in Europe during its prime, and the prominent Italian family of bankers were early adopters of fractional reserve banking, a practice that Medici Bank customers were unaware of, and that ultimately led to the financial institution’s failure.

‘Nothing New’— How the Medici Bank Failure Is Still Very Relevant to Today’s Modern Banking Practices

The collapse of three major banks in mid-March 2023 has caused people to scrutinize the risks of fractional reserve banking. The practice of fractional reserve banking is essentially when a financial institution holds only a fraction of deposits in the bank, and the remaining funds are used to lend or invest in order to obtain a yield. One of the earliest known examples of fractional reserve banking was the Medici Bank, founded in Florence, Italy, in 1397 by Giovanni di Bicci de’ Medici.

In the first five years of operation, the Medici Bank grew rapidly, and before the financial institution’s demise, it established branches all over Western Europe. Similar to bankers in the early 20th century like J.P. Morgan, Jacob Schiff, Paul Warburg, and George F. Baker, members of the House of Medici were extremely powerful. The Medici Bank was known to be one of the largest business enterprises during the Renaissance but ultimately failed after close to 100 years of operation.

Philip J. Weights, the president of the Swiss Finance and Technology Association (SFTA), explained in a 2015 Linkedin post how the weight of “excessive lending” and “insufficient reserves” led to the bank’s ultimate demise. According to Raymond De Roover’s book “The Rise and Decline of the Medici Bank (1397-1494),” published in 1963, liquidity was an issue from the bank’s inception. De Roover’s book details that the Medicis’ reserves held less than 10% of deposits due to the family members’ managerial abilities.

The 380-page book explains how the Medici Bank experienced a period of decline between 1463 and 1490 due to shady and corrupt banking practices. The fraudulent schemes caused several Medici branches to be liquidated and sold off to other banks. De Roover argued that despite being a prominent member of the House of Medici and a successful banker, Francesco Sassetti “was…