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The Regulation of Private Money

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  • Gary B. Gorton

Abstract

Financial crises are bank runs. At root the problem is short-term debt (private money), which while an essential feature of market economies, is inherently vulnerable to runs in all its forms (not just demand deposits). Bank regulation aims at preventing bank runs. History shows two approaches to bank regulation: the use of high quality collateral to back banks’ short-term debt and government insurance for the short-term debt. Also, explicit or implicit limitations on entry into banking can create charter value (an intangible asset) that is lost if the bank fails. This can create an incentive for the bank to abide by the regulations and not take too much risk.

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  • Gary B. Gorton, 2019. "The Regulation of Private Money," NBER Working Papers 25891, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25891
    Note: CF DAE ME
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    References listed on IDEAS

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    2. Wayne Passmore & Judit Temesvary, 2020. "Investor Demands for Safety, Bank Capital, and Liquidity Measurement," Finance and Economics Discussion Series 2020-079, Board of Governors of the Federal Reserve System (U.S.).
    3. van Eeghen, Piet-Hein, 2021. "Funding money-creating banks: Cash funding, balance sheet funding and the moral hazard of currency elasticity," International Review of Financial Analysis, Elsevier, vol. 76(C).
    4. Panetti, Ettore, 2022. "Banks’ liquidity provision and panic runs with recursive preferences," Finance Research Letters, Elsevier, vol. 47(PA).

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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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