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Remedy For Banking Crises: What Chicago And Islam Have In Common

Author

Listed:
  • GARCÍA, VALERIANO F.

    (CEO ,Washington International Advisors)

  • CIBILS, VICENTE FRETES

    (The World Bank)

  • MAINO, RODOLFO

    (International Monetary Fund.)

Abstract

We document banking system instability arising from a combination of fractional reserve requirements, deposit insurance and moral hazard by presenting several episodes of severe banking distress and crises in Asia. Following a framework of functional perspective suggested by Merton and Bodie (1993), we argue that one hundred percent reserves, “narrow banking”, provides a basis for banking reform and an alternative to reduce the likelihood of systemic financial crises. Both the narrow banking and the Islamic system (equity-based systems) provide more stability to a banking sector than a conventional banking system does. Moreover, the interlinkages of financial markets and the scope for instantaneous reversal of capital flows carry potentially huge systemic risks that could prove costly in terms of economic growth and welfare.

Suggested Citation

  • García, Valeriano F. & Cibils, Vicente Fretes & Maino, Rodolfo, 2004. "Remedy For Banking Crises: What Chicago And Islam Have In Common," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 11, pages 2-22.
    • Handle: RePEc:ris:isecst:0067
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    References listed on IDEAS

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    1. Ronnie Phillips, 1992. "The 'Chicago Plan' and New Deal Banking Reform," Economics Working Paper Archive wp_76, Levy Economics Institute.
    2. Kareken, John H, 1986. "Federal Bank Regulatory Policy: A Description and Some Observations," The Journal of Business, University of Chicago Press, vol. 59(1), pages 3-48, January.
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    Cited by:

    1. Ascarya & Ugi Suharto, 2021. "Integrated Islamic Social and Commercial Finance to Achieve SDGs," Springer Books, in: Mohd Ma'Sum Billah (ed.), Islamic Wealth and the SDGs, chapter 0, pages 105-127, Springer.
    2. Ascarya Ascarya & Ugi Suharto & Jardine A. Husman, 2022. "Proposed model of integrated Islamic commercial and social finance for Islamic bank in Indonesia," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 12(1), pages 115-138, March.

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