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Narrow Banking Reconsidered, The Functional Approach to Financial Reform

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Ronnie J. Phillips

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Abstract

Phillips presents the functional approach to reforming the financial system.This approach advocates the structural separation of the depository and lending functions of banks. As a result of such a separation, monetary and credit policy undergo a parallel separation, and government supervision and regulation of the banking industry are modified. The policy prescription developed within this approach is narrow banking, the creation of separate monetary and financial service companies with the elimination of or a substantial reduction in deposit insurance. Narrow banking not only meets the safety and soundness goals of bank regulation, but also maintains an institutional structure that accommodates market forces and technological innovation. He recommends the creation of monetary service companies that would serve strictly a payments function and would hold only safe assets and the establishment by the federal government of a mutual fund that holds only government securities as assets.

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Paper provided by Levy Economics Institute, The in its series Economics Public Policy Brief Archive with number 17.

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Handle: RePEc:lev:levppb:17

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Thomas F. Huertas, 1987. "Redesigning regulation: the future of finance in the United States," Proceedings, Federal Reserve Bank of Kansas City, pages 139-166, .
  2. John H. Kareken, 1985. "Ensuring financial stability," Proceedings, Federal Reserve Bank of San Francisco, pages 53-86.
  3. Hyman P. Minsky, 1994. "Financial instability and the decline(?) of banking: public policy implications," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 55-68.
  4. George J. Benston & George G. Kaufman, 1988. "Risk and solvency regulation of depository institutions: past policies and current options," Staff Memoranda 88-1, Federal Reserve Bank of Chicago.
  5. Mark D. Flood, 1992. "The great deposit insurance debate," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 51-77. [Downloadable!]
  6. Dimitri B. Papadimitriou & Ronnie J. Phillips & L. Randall Wray, 1993. "The Community Reinvestment Act, Lending Discrimination, and the Role of Community Development Banks," Economics Working Paper Archive 95, Levy Economics Institute, The. [Downloadable!]
  7. Carter H. Golembe & John J. Mingo, 1985. "Can supervision and regulation ensure financial stability?," Proceedings, Federal Reserve Bank of San Francisco, pages 125-164.
  8. Merton, Robert C. & Bodie, Zvi, 1993. "Deposit insurance reform: a functional approach," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 38, pages 1-34, June. [Downloadable!] (restricted)
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  1. L. Randall Wray, 2006. "CAN BASEL II ENHANCE FINANCIAL STABILITY?: A Pessimistic View," Economics Public Policy Brief Archive ppb_84, Levy Economics Institute, The. [Downloadable!]
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