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How to Avoid the Next Taxpayer Bailout of the Financial System: The Narrow Banking Proposal

Listed author(s):
  • Ronnie J. Phillips
  • Alessandro Roselli

As recovery from the present economic crisis begins, policymakers must address what reforms will be made in financial system in order to prevent the reoccurrence of a similar crisis in the future. What will Congress do in response? In terms of long-term financial reform, what is to be expected from Congress is passage of legislation that increases oversight and regulation by the federal financial regulatory agencies. The purpose of this policy brief is to explain and evaluate one proposal for reform of the financial system that would help mitigate the policy conundrum that often results from conflicting short-run and long-run policies. This proposal, known as 'narrow banking,' would separately regulate and supervise the role of banks in providing a safe and stable means of payment from the system of credit creation by financial institutions. The heart of the proposal is to make checkable deposits as safe a means of payment as currency presently issued by the Federal Reserve System, but without the need for the elaborate supervisory and regulatory structure required.

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Paper provided by Indiana State University, Scott College of Business, Networks Financial Institute in its series NFI Policy Briefs with number 2009-PB-05.

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Length: 32 pages
Date of creation: Aug 2009
Handle: RePEc:nfi:nfipbs:2009-pb-05
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  1. S. Mishkin, Frederic, 1999. "Financial consolidation: Dangers and opportunities," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 675-691, February.
  2. Padoa-Schioppa, Tommaso, 2004. "Regulating Finance: Balancing Freedom and Risk," OUP Catalogue, Oxford University Press, number 9780199270569.
  3. Ronnie J. Phillips, "undated". "Narrow Banking Reconsidered, The Functional Approach to Financial Reform," Economics Public Policy Brief Archive ppb_17, Levy Economics Institute.
  4. Kenneth Spong, 1993. "Narrow Banks: An Alternative Approach to Banking Reform," Economics Working Paper Archive wp_90, Levy Economics Institute.
  5. Ronnie Phillips, 1992. "The 'Chicago Plan' and New Deal Banking Reform," Economics Working Paper Archive wp_76, Levy Economics Institute.
  6. Robert Litan & William Isaac & William Taylor, 1994. "Financial Regulation," NBER Chapters,in: American Economic Policy in the 1980s, pages 519-572 National Bureau of Economic Research, Inc.
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