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Narrow Banking

Author

Listed:
  • George Pennacchi

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

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.

Suggested Citation

  • George Pennacchi, 2012. "Narrow Banking," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 141-159, October.
  • Handle: RePEc:anr:refeco:v:4:y:2012:p:141-159
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-financial-110311-101758
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    Citations

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    Cited by:

    1. Brett Fiebiger, 2014. "‘The Chicago Plan revisited’: a friendly critique," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 11(3), pages 227-249, December.
    2. Andrzej Slawinski, 2015. "Shielding money creation from severe banking crises: How useful are proposals offered by the alternative reform plans?," Bank i Kredyt, Narodowy Bank Polski, vol. 46(3), pages 191-206.
    3. Hanson, Samuel G. & Shleifer, Andrei & Stein, Jeremy C. & Vishny, Robert W., 2015. "Banks as patient fixed-income investors," Journal of Financial Economics, Elsevier, vol. 117(3), pages 449-469.
    4. Erkki Liikanen, 2013. "Changes in banking in the run-up to the crisis," Chapters,in: A New Model for Balanced Growth and Convergence, chapter 2, pages 12-18 Edward Elgar Publishing.
    5. Maciej Albinowski, 2017. "The role of fractional-reserve banking in amplifying credit booms: evidence from panel data," Working Papers 2017-024, Warsaw School of Economics, Collegium of Economic Analysis.
    6. Simas Kucinskas, 2015. "Liquidity Creation without Banks," Tinbergen Institute Discussion Papers 15-101/VI, Tinbergen Institute.
    7. Michele Fratianni, 2017. "It is time to separate money banks from credit banks in Italy," Mo.Fi.R. Working Papers 138, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    8. Maciej Albinowski, 2017. "The role of fractional-reserve banking in amplifying credit booms: evidence from panel data," Working Papers 2016-024, Warsaw School of Economics, Collegium of Economic Analysis.
    9. Simas Kucinskas, 2015. "Liquidity creation without banks," DNB Working Papers 482, Netherlands Central Bank, Research Department.
    10. repec:eee:finsta:v:31:y:2017:i:c:p:107-118 is not listed on IDEAS

    More about this item

    Keywords

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

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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