It is my understanding that countries without fractional reserve requirements still have capital requirements, but what I do not understand is how equity can be used to satisfy these requirements without causing large amounts of inflation in the housing market.
If banks are not required to have currency reserves, then what is to prevent them from extending themselves effectively unlimited credit based on their equity? In the short term, they may be limited by debt to equity ratios, but in the long term, wouldn't this lead to a consistent rate of near constant inflation?
Every time a bank issues credit to buy a house, (in aggregate, of course) the price of housing increases, which increases equity, which allows them to issue more credit..
Does anyone else not see a problem with this?