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Deposit insurance, bank regulation, and narrow banking

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  • Williamson, Stephen

Abstract

Narrow banking has surfaced frequently as a proposed framework for dealing with financial instability and inefficiency. Recent proposals include reforms intended to improve the implementation of monetary policy, and to deal with perceived problems related to stablecoins. A model is constructed in which banks must deal with three frictions: limited commitment, moral hazard with respect to risky assets, and potential misrepresentation of safe assets. Surprisingly, deposit insurance does not engender inefficiency, and government-imposed capital requirements and leverage requirements serve to reduce welfare. The viability of narrow banking depends on inefficient regulation in conventional banking, and narrow banking is never welfare-improving.

Suggested Citation

  • Williamson, Stephen, 2024. "Deposit insurance, bank regulation, and narrow banking," Journal of Economic Theory, Elsevier, vol. 219(C).
    • Handle: RePEc:eee:jetheo:v:219:y:2024:i:c:s0022053124000656
    DOI: 10.1016/j.jet.2024.105859
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    References listed on IDEAS

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    More about this item

    Keywords

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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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