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Financial Fragility without Banks

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Abstract

Proponents of narrow banking have argued that lender of last resort policies by central banks, along with deposit insurance and other government interventions in the money markets, are the primary causes of financial instability. However, as we show in this post, non-bank financial institutions (NBFIs) triggered a financial crisis in 1772 even though the financial system at that time had few banks and deposits were not insured. NBFIs profited from funding risky, longer-dated assets using cheap short-term wholesale funding and, when they eventually failed, authorities felt compelled to rescue the financial system.

Suggested Citation

  • Stein Berre & Asani Sarkar, 2023. "Financial Fragility without Banks," Liberty Street Economics 20230417, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:95976
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    File URL: https://libertystreeteconomics.newyorkfed.org/2023/04/financial-fragility-without-banks/
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    More about this item

    Keywords

    nonbank financial institutions; nonbank financial institutions (NBFIs); crisis of 1772; financial intermediation; economic history;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services
    • N00 - Economic History - - General - - - General

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