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Should Banks Be Narrowed?

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  • Biagio Bossone
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    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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    File URL: http://www.levyinstitute.org/pubs/wp354.pdf
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    Bibliographic Info

    Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_354.

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    Date of creation: Sep 2002
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    Handle: RePEc:lev:wrkpap:wp_354

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    Web page: http://www.levyinstitute.org

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    1. 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.
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    Cited by:
    1. Greg Hannsgen, 2004. "Borrowing Alone The Theory and Policy Implications of the Commodification of Finance," Finance 0402011, EconWPA.

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