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Fractional reserve banking, through credit allocation activity, places the commercial banking system at the core of the money supply mechanism, critically influencing investment and economic development. Considerable evidence, analyzed in this paper, suggests that banks, naturally driven by private interests, are incentivized to allocate credit towards safer and more profitable investments particularly limiting their exposure to small and medium-sized enterprises (SMEs) and their productive activities.
This allocation pattern generates significant constraints for real GDP expansion, SMEs employment and the overall financial system stability. The paper suggests that the delegation of this crucial role to private institutions may not always align with the collective interests of regulators and public institutions.
Through expert based and qualitative research the study examines the structural, institutional, and regulatory impediments to productive credit allocation, particularly as they affect SMEs. It identifies the main systemic problems that stem from the delegation of money supply to commercial banks exposing their anti cyclical nature and credit allocation model both risk and size adverse. Ultimately, the paper evidence emerging trends that exacerbate these issues and suggesting solutions with the goal to tighten the gap between public economic goals and private banks interests.
