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Should Banks Be Narrowed?

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Author Info
Biagio Bossone
Abstract

Over the past 70 years, a proposal to narrow the scope of banks has emerged more and more frequently in financial debates and research. Narrow banking would prevent deposit-issuing banks from lending to the private sector and restrict nonbank intermediaries from funding investments with demand deposits. Proponents of narrow banking defend it as a step toward greater financial stability and efficiency. This study reviews the literature on the subject, contrasts the concept of narrow banking with contemporary banking theories, and evaluates the potential effects of narrow banking on finance and the real economy. The study also delineates an empirical exercise to estimate the costs of bank narrowness and draws policy conclusions based on those estimates.

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Paper provided by Levy Economics Institute, The in its series Economics Working Paper Archive with number 354.

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Date of creation: Sep 2002
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Handle: RePEc:lev:wrkpap:354

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Ghosh, Saibal & Saggar, Mridul, 1998. "Narrow Banking: Theory, evidence and prospects in India," MPRA Paper 17352, University Library of Munich, Germany. [Downloadable!]
  2. Frederic S. Mishkin, 1999. "Financial Consolidation: Dangers and Opportunities," NBER Working Papers 6655, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 1999. "Banks as Liquidity Providers: An Explanation for the Co-Existence of Lending and Deposit-Taking," NBER Working Papers 6962, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 1999. "A new database on financial development and structure," Policy Research Working Paper Series 2146, The World Bank. [Downloadable!]
  5. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  6. Calomiris, Charles W., 1999. "Building an incentive-compatible safety net," Journal of Banking & Finance, Elsevier, vol. 23(10), pages 1499-1519, October. [Downloadable!] (restricted)
  7. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Bossone, Biagio, 2001. "Circuit theory of banking and finance," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 857-890, May. [Downloadable!] (restricted)
  9. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June. [Downloadable!] (restricted)
  10. Marc R. Saidenberg & Philip E. Strahan, 1999. "Are banks still important for financing large businesses?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Jul. [Downloadable!]
  11. Azariadis, Costas & Bullard, James & Smith, Bruce D., 2001. "Private and Public Circulating Liabilities," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 59-116, July. [Downloadable!] (restricted)
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  12. Charles Frederick Kramer & Garry J. Schinasi & T. Todd Smith, . "Financial Implications of the Shrinking Supply of U.S. Treasury Securities," IMF Working Papers 01/61, International Monetary Fund. [Downloadable!]
  13. Craine, Roger, 1995. " Fairly Priced Deposit Insurance and Bank Charter Policy," Journal of Finance, American Finance Association, vol. 50(5), pages 1735-46, December. [Downloadable!] (restricted)
  14. Randall J. Pozdena, 1991. "The false hope of the narrow bank," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Nov 8. [Downloadable!]
  15. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June. [Downloadable!] (restricted)
  16. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June. [Downloadable!] (restricted)
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  17. John H. Kareken, 1985. "Ensuring financial stability," Proceedings, Federal Reserve Bank of San Francisco, pages 53-86.
  18. Caprio, Gerard Jr. & Summers, Lawrence H., 1993. "Finance and its reform : beyond laissez-faire," Policy Research Working Paper Series 1171, The World Bank. [Downloadable!]
  19. Ronnie Phillips, 1992. "The 'Chicago Plan' and New Deal Banking Reform," Economics Working Paper Archive 76, Levy Economics Institute, The. [Downloadable!]
  20. Kobayakawa, Shuji & Nakamura, Hisashi, 2000. "A Theoretical Analysis of Narrow Banking Proposals," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 18(1), pages 105-18, May. [Downloadable!]
  21. Roger Craine., 1995. "Fairly Priced Deposit Insurance and Bank Charter Policy," Economics Working Papers 95-234, University of California at Berkeley. [Downloadable!]
  22. Douglas D. Evanoff & Larry D. Wall, 2001. "Sub-debt yield spreads as bank risk measures," Working Paper 2001-11, Federal Reserve Bank of Atlanta. [Downloadable!]
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  23. Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October. [Downloadable!] (restricted)
  24. Thakor, Anjan V., 1996. "The design of financial systems: An overview," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 917-948, June. [Downloadable!] (restricted)
  25. Flannery, Mark J., 1993. "Deposit insurance reform: a functional approach: A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 38(1), pages 35-40, June. [Downloadable!] (restricted)
  26. Merton, Robert C. & Bodie, Zvi, 1993. "Deposit insurance reform: a functional approach," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 38(1), pages 1-34, June. [Downloadable!] (restricted)
  27. Neil Wallace, 1996. "Narrow banking meets the Diamond-Dybvig model," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-13. [Downloadable!]
  28. Silas Keehn, . "Banking on the balance : powers and the safety net : a proposal," Monograph, Federal Reserve Bank of Chicago, number 1989botbpatsna.
  29. Douglas W. Diamond & Raghuram G. Rajan, 1998. "Liquidity risk, liquidity creation and financial fragility: a theory of banking," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
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  1. Greg Hannsgen, 2004. "Borrowing Alone The Theory and Policy Implications of the Commodification of Finance," Finance 0402011, EconWPA. [Downloadable!]
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