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


  • 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.

Suggested Citation

  • Ronnie J. Phillips & Alessandro Roselli, 2009. "How to Avoid the Next Taxpayer Bailout of the Financial System: The Narrow Banking Proposal," NFI Policy Briefs 2009-PB-05, Indiana State University, Scott College of Business, Networks Financial Institute.
  • Handle: RePEc:nfi:nfipbs:2009-pb-05

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    References listed on IDEAS

    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, June.
    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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    Cited by:

    1. Maciej Albinowski, 2017. "The role of fractional-reserve banking in amplifying credit booms: evidence from panel data," Working Papers 2017-024, Warsaw School of Economics, Collegium of Economic Analysis.
    2. Radojičić Jelena & Radovanović Predrag, 2015. "Narrow Banking – Banking System Without Private Issuance of Credit Money as a Solution for More Resistant Banks and More Stable Financial System," Economic Themes, De Gruyter Open, vol. 53(3), pages 376-397, September.
    3. Maciej Albinowski, 2017. "The role of fractional-reserve banking in amplifying credit booms: evidence from panel data," Working Papers 2016-024, Warsaw School of Economics, Collegium of Economic Analysis.
    4. Dumitriu, Ramona & Stefanescu, Razvan, 2014. "Perspective ale ţintirii inflaţiei
      [Perspectives of the Inflation Targeting]
      ," MPRA Paper 52943, University Library of Munich, Germany, revised 14 Jan 2014.
    5. Patrizio Lainà, 2015. "Proposals for Full-Reserve Banking: A Historical Survey from David Ricardo to Martin Wolf," Economic Thought, World Economics Association, vol. 4(2), pages 1-1, September.

    More about this item


    banking regulation; narrow banks; financial crisis;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers


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