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Private money and banking regulation

Listed author(s):
  • Monnet, Cyril

    (Federal Reserve Bank of Philadelphia)

  • Sanches, Daniel R.

    (Federal Reserve Bank of Philadelphia)

We show that a competitive banking system is inconsistent with an optimum quantity of private money. Because bankers cannot commit to their promises and the composition of their assets is not publicly observable, a positive franchise value is required to induce the full convertibility of bank liabilities. Under perfect competition, a positive franchise value can be obtained only if the return on bank liabilities is sufficiently low, which imposes a cost on those who hold these liabilities for transaction purposes. If the banking system is monopolistic, then an efficient allocation is incentive-feasible. In this case, the members of the banking system obtain a higher return on assets, making it feasible to pay a sufficiently high return on bank liabilities. Finally, we argue that the regulation of the banking system is required to obtain efficiency.

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File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2015/wp15-19.pdf
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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 15-19.

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Length: 46 pages
Date of creation: 09 Apr 2015
Handle: RePEc:fip:fedpwp:15-19
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  1. Holmström, Bengt, 2013. "Inside and Outside Liquidity," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262518536, December.
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  16. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
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