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The Regulation of Private Money

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  • GARY GORTON

Abstract

Financial crises are bank runs. At root, the problem is short‐term debt (private money), which while an essential feature of market economies, is inherently vulnerable to runs in all its forms (not just demand deposits). Bank regulation aims at preventing bank runs. History shows two approaches to bank regulation: the use of high‐quality collateral to back banks’ short‐term debt and government insurance for the short‐term debt. Also, explicit or implicit limitations on entry into banking can create charter value (an intangible asset) that is lost if the bank fails. This can create an incentive for the bank to abide by the regulations and not take too much risk.

Suggested Citation

  • Gary Gorton, 2020. "The Regulation of Private Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(S1), pages 21-42, October.
    • Handle: RePEc:wly:jmoncb:v:52:y:2020:i:s1:p:21-42
    DOI: 10.1111/jmcb.12731
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    References listed on IDEAS

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    1. Cipriani, Marco & La Spada, Gabriele, 2021. "Investors’ appetite for money-like assets: The MMF industry after the 2014 regulatory reform," Journal of Financial Economics, Elsevier, vol. 140(1), pages 250-269.

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