It is time to separate money banks from credit banks in Italy

This paper argues that the Italian banking system would benefit from a profound restructuring achieved by separating safe banks, or money banks, from credit banks. The former would accept demandable deposits to be fully collateralized by a combination of monetary base and interestrate- and-credit-risk-free assets. The latter would fund illiquid loans with equities and long-dated debt obligations. The money bank would fulfill the objective of fully protecting savings in the form of money without the necessity of heavy regulation. The risky bank, the credit bank, would not be exposed to liquidity crises because one cannot run against long-dated bonds and equity. The credit bank, which is subject to insolvency risk, would bear a more intense regulatory and supervision structure than the money bank.