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Narrow banking meets the Diamond-Dybvig model

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  • Neil Wallace

Abstract

A version of the Diamond-Dybvig model of banking is used to evaluate the narrow banking proposal, the idea that banks should be required to back demand deposits entirely by safe short-term assets. It is shown that the mere existence of an amount of safe short-term assets outside the banking system that exceeds banking system liabilities does not make the proposal either innocuous or desirable. In fact, despite such existence, using narrow banking to cope with banking system illiquidity eliminates the role of the banking system.

Suggested Citation

  • Neil Wallace, 1996. "Narrow banking meets the Diamond-Dybvig model," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 20(Win), pages 3-13.
    • Handle: RePEc:fip:fedmqr:y:1996:i:win:p:3-13:n:v.20no.1
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    Citations

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    Cited by:

    1. Chang, R. & Velasco, A., 1998. "Financial Crises in Emerging Markets: A Canonical Model," Working Papers 98-21, C.V. Starr Center for Applied Economics, New York University.
    2. Ennis, Huberto M. & Keister, Todd, 2003. "Economic growth, liquidity, and bank runs," Journal of Economic Theory, Elsevier, vol. 109(2), pages 220-245, April.
    3. Carrasco, Vinicius & Salgado, Pablo, 2014. "Coordinated strategic defaults and financial fragility in a costly state verification model," Journal of Financial Intermediation, Elsevier, vol. 23(1), pages 129-139.
    4. Daniel Sanches, 2016. "On The Welfare Properties Of Fractional Reserve Banking," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(3), pages 935-954, August.
    5. João Santos, 1998. "Commercial Banks in the Securities Business: A Review," Journal of Financial Services Research, Springer;Western Finance Association, vol. 14(1), pages 35-60, July.
    6. Niinimaki, Juha-Pekka, 2002. "Do time deposits prevent bank runs?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 12(1), pages 19-31, February.
    7. Bossone, Biagio, 2000. "What makes banks special ? a study of banking, finance, and economic development," Policy Research Working Paper Series 2408, The World Bank.
    8. Chang, Chia-Ying, 2012. "When banking systems meet currencies," Working Paper Series 2062, Victoria University of Wellington, School of Economics and Finance.
    9. Chang, Roberto & Velasco, Andres, 2000. "Financial Fragility and the Exchange Rate Regime," Journal of Economic Theory, Elsevier, vol. 92(1), pages 1-34, May.
    10. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July.
    11. Marco A. Espinosa-Vega & Steven Russell, 1996. "The Mexican economic crisis: alternative views," Economic Review, Federal Reserve Bank of Atlanta, vol. 80(Jan), pages 21-44.
    12. Fujiki, Hiroshi & Green, Edward J. & Yamazaki, Akira, 2008. "Incentive efficient risk sharing in a settlement mechanism," Journal of Economic Theory, Elsevier, vol. 142(1), pages 178-195, September.
    13. Peck, James & Shell, Karl, 2010. "Could making banks hold only liquid assets induce bank runs?," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 420-427, May.
    14. repec:cte:dbrepe:db040403 is not listed on IDEAS
    15. Roberto Chang & Andrés Velasco, 2000. "Liquidity Crises in Emerging Markets: Theory and Policy," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 11-78, National Bureau of Economic Research, Inc.
    16. Krainer, Robert E., 2017. "Economic stability under alternative banking systems: Theory and policy," Journal of Financial Stability, Elsevier, vol. 31(C), pages 107-118.
    17. Al-Jarhi, Mabid Ali, 2004. "Remedy For Banking Crises: What Chicago And Islam Have In Common: A Comment," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 11, pages 24-42.
    18. Thorsten Beck & Robin Döttling & Thomas Lambert & Mathijs Dijk, 2023. "Liquidity creation, investment, and growth," Journal of Economic Growth, Springer, vol. 28(2), pages 297-336, June.
    19. Ghosh, Saibal & Saggar, Mridul, 1998. "Narrow Banking: Theory, evidence and prospects in India," MPRA Paper 17352, University Library of Munich, Germany.
    20. Bossone, Biagio, 2001. "Do banks have a future?: A study on banking and finance as we move into the third millennium," Journal of Banking & Finance, Elsevier, vol. 25(12), pages 2239-2276, December.
    21. James Peck & Karl Shell, 2003. "Bank Portfolio Restrictions and Equilibrium Bank Runs," Levine's Bibliography 666156000000000077, UCLA Department of Economics.
    22. Chang, Chia-Ying, 2013. "Banking crises, sudden stops, and the effectiveness of short-term lending," Working Paper Series 2982, Victoria University of Wellington, School of Economics and Finance.
    23. Simas Kucinskas, 2015. "Liquidity Creation without Banks," Tinbergen Institute Discussion Papers 15-101/VI, Tinbergen Institute.
    24. Simas Kucinskas, 2015. "Liquidity creation without banks," DNB Working Papers 482, Netherlands Central Bank, Research Department.
    25. Roberto Chang & Andres Velasco, 1998. "Financial Crises in Emerging Markets," NBER Working Papers 6606, National Bureau of Economic Research, Inc.

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    Keywords

    Bank reserves;

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