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Narrow Banking

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  • George Pennacchi

    ()
    (Department of Finance, University of Illinois, Champaign, Illinois 61820)

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    Abstract

    This review discusses the history of narrow banks, reform proposals involving narrow banks, and theory and empirical evidence regarding whether narrow banks should play a more prominent role in the financial system. Prior to the early-twentieth century, US banks tended to be much narrower than they are today. Common modern banking practices, such as maturity transformation and explicit loan commitments, arose only after the creation of the Federal Reserve and the FDIC. My review of theory and empirical evidence finds it largely supportive of narrow bank reforms. Most importantly, a narrow-banking system could have huge advantages in containing moral hazard and reducing the overall risk and required regulation of the financial system.

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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-financial-110311-101758
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    Bibliographic Info

    Article provided by Annual Reviews in its journal Annual Review of Financial Economics.

    Volume (Year): 4 (2012)
    Issue (Month): 1 (October)
    Pages: 141-159

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    Handle: RePEc:anr:refeco:v:4:y:2012:p:141-159

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    Related research

    Keywords: bank regulation; narrow banks; money market funds; finance companies; deposit insurance;

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