Re-defining fractional reserve banking : challenging the mutuum classification to recognize the ‘sui generis’ nature of bank deposits

Abstract

The business of banking is constituted through a private law contract yet operates within a stringent public law regulatory framework harmonised across the European Union. Under Maltese law, the depositor–bank relationship is traditionally classified as a loan for consumption (mutuum) under Article 1894 of the Civil Code. However, the study reveals a misalignment with the functional and economic reality of bank deposits. This mischaracterisation generates doctrinal ambiguity and undermines depositor rights. While these inconsistencies arise at a micro level, they assume systemic significance considering a regulatory framework that operates predominantly on an ex post basis, without grounding itself in a coherent private law classification. Chapter 1 situates the analysis within the theoretical and historical foundations of banking. It examines money, credit creation, and business cycles, showing how modern banking operates through the transformation and circulation of funds rather than safekeeping. By tracing the evolution of banking practice, the chapter establishes that economic reality has outgrown traditional classifications, laying the groundwork for reassessing the juridical nature of bank deposits. Chapter 2 critically analyses the classification of the depositor–bank relationship under Maltese law. It evaluates the irregular deposit and mutuum, demonstrating that neither fully captures modern bank deposits. The chapter exposes the resulting inconsistencies and advances a distinct, sui generis contractual classification reflecting both the use of funds and the continued relevance of safekeeping. Chapter 3 examines the EU banking regulatory framework and its interaction with the private law nature of the depositor–bank relationship. It shows that the system recognises features inconsistent with a mutuum classification, particularly in its emphasis on liquidity, risk, and depositor protection. The chapter argues that the framework remains predominantly ex post and contends that a shift towards a more coherent, ex ante approach, grounded in a harmonised private law classification, is necessary.