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A Theoretical Analysis of Narrow Banking Proposals

  • Kobayakawa, Shuji

    (Bank of Japan)

  • Nakamura, Hisashi

    (U Chicago)

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    The purpose of this paper is to examine narrow banking proposals. First, we survey the narrow banking proposals presented in the United States and Japan, and categorize them by means of two standards: (1) whether safe assets that a narrow bank is allowed to hold are limited to short-term assets, and (2) whether a narrow bank is allowed to engage in lending activity. Second, we examine the feasibility of each proposal for the purpose of achieving the stability of the financial system, making use of two theoretical models: Wallace (1996) and Kashyap, Rajan, and Stein (1998). Finally, we conclude that a desirable narrow bank is one that carries out both deposit-taking and lending activities, though restrictively, and is allowed to invest in short-term safe assets.

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    File URL: http://www.imes.boj.or.jp/research/papers/english/me18-1-4.pdf
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    Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

    Volume (Year): 18 (2000)
    Issue (Month): 1 (May)
    Pages: 105-118

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    Handle: RePEc:ime:imemes:v:18:y:2000:i:1:p:105-118
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