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Should Banks Be "Narrowed"? An Evaluation of a Plan to Reduce Financial Instability

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Biagio Bossone
Abstract

In this issue, Biagio Bossone of the IMF evaluates narrow banking from the perspective of modern theories of financial intermediation. These theories portray the status quo banking system as a solution to otherwise intractable problems of imperfect information, risk, and even moral hazard. The system's characteristic coupling of liquid liabilities with illiquid assets-seen by some as an undesirable "mismatch"? in fact contributes greatly to the efficiency of the economy. Bossone argues that these efficiency gains outweigh the disadvantages associated with the existing legal framework.

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Paper provided by Levy Economics Institute, The in its series Economics Public Policy Brief Archive with number 69.

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  2. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June. [Downloadable!] (restricted)
  3. Benston, George J. & Kaufman, George G., 1993. "Deposit insurance reform: a functional approach : A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 38(1), pages 41-50, June. [Downloadable!] (restricted)
  4. Flannery, Mark J., 1993. "Deposit insurance reform: a functional approach: A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 38(1), pages 35-40, June. [Downloadable!] (restricted)
  5. Merton, Robert C. & Bodie, Zvi, 1993. "Deposit insurance reform: a functional approach," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 38(1), pages 1-34, June. [Downloadable!] (restricted)
  6. Silas Keehn, . "Banking on the balance : powers and the safety net : a proposal," Monograph, Federal Reserve Bank of Chicago, number 1989botbpatsna.
  7. Ghosh, Saibal & Saggar, Mridul, 1998. "Narrow Banking: Theory, evidence and prospects in India," MPRA Paper 17352, University Library of Munich, Germany. [Downloadable!]
  8. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 1999. "Banks as Liquidity Providers: An Explanation for the Co-Existence of Lending and Deposit-Taking," NBER Working Papers 6962, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Calomiris, Charles W., 1999. "Building an incentive-compatible safety net," Journal of Banking & Finance, Elsevier, vol. 23(10), pages 1499-1519, October. [Downloadable!] (restricted)
  10. McCulloch, J Huston, 1986. "Bank Regulation and Deposit Insurance," Journal of Business, University of Chicago Press, vol. 59(1), pages 79-85, January. [Downloadable!] (restricted)
  11. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June. [Downloadable!] (restricted)
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  12. John H. Kareken, 1985. "Ensuring financial stability," Proceedings, Federal Reserve Bank of San Francisco, pages 53-86.
  13. Douglas W. Diamond & Raghuram G. Rajan, 1998. "Liquidity risk, liquidity creation and financial fragility: a theory of banking," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
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