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Narrow Banking with Modern Depository Institutions: Is there a Reason to Panic?

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  • Hugo Rodríguez Mendizábal

Abstract

What would be the effect of imposing a 100 percent reserve require- ment to depository institutions? This paper contends that reserves do not compete with loans on the asset side of bank’s balance sheets. Thus, they only affect liquidity provision by banks indirectly through their impact on the cost of loan and deposit creation. This cost could be driven to zero if, as the Eurosystem does, central banks remunerated required reserves at the same rate of their refinancing operations. The paper argues that the crucial constraint imposed by a fully backed banking system is collateral availability by depository institutions.

Suggested Citation

  • Hugo Rodríguez Mendizábal, 2017. "Narrow Banking with Modern Depository Institutions: Is there a Reason to Panic?," Working Papers 955, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:955
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    References listed on IDEAS

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    More about this item

    Keywords

    narrow banking; endogenous money; interbank market; bank solvency; liquidity; monetary policy;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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