The Legitimacy of Loan Maturity Mismatching: A Risky,but not Fraudulent,Undertaking

Barnett and Block (Journal of Business Ethics, 2009) 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 (Money, Bank Credit and Economic Cycles, 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.