Here's how a bitcoin bank that takes actual bitcoin deposits and loans out actual bitcoins might work:

The bank offers to the depositor:

- Security for his bitcoins. The bank takes extreme measures to store the bitcoins in multiple forms, offline, heavily encrypted and insured in its vaults
- An easy, secure web interface to make and accept payments
- Perhaps a modest interest rate. But the above features may be enough to entice people to make deposits and keep their money in the bank.
- 50-99% reserve.... really depends on what the market will bear, but definitely greater than the 10% that is required now, I suspect.

Then, a certain percentage of bitcoins goes out in the form of commercial and consumer loans. Voila! Free market fractional reserve banking. Anyone want to start a business with me?