IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Are failproof banking systems feasible? Desirable?

Listed author(s):
  • Talley, Samuel H.
Registered author(s):

    In recent years, instability of the banking system has returned as a major problem in many countries, particularly in the developing world. In many cases, this instability has been so threatening to financial intermediation and the functioning of the payments system that governments have felt compelled to intervene and restructure banks, often at considerable cost to the public budget. One response to these problems has been a proposal to create failproof banking systems - to radically transform the structure, priorities, and operation of the banking and financial system. Banks would be limited to issuing deposits, holding essentially riskless portfolios, and operating the payments system. To minimize the resulting disruptions to the financial system, banks would be authorized (and encouraged) to set up holding companies and then transfer to holding company affiliates all the functions - including lending - that banks would no longer be permitted to perform. So while the failproof banking proposal would severely restrict the activity of banks, it would not restrict the activities of banking organizations that convert to a holding company form of organization. This proposal would produce major public benefits. It would assure a nation of a smoothly functioning banking and payments system, would substantially reduce the resources committed to banking supervision, would prevent bank-type regulation from expanding to the rest of the financial system, and would place banking and nonbanking organizations on a level playing field for the financial activities in which they compete. There are two major problems with the proposal. First, it might be difficult to implement because of too few riskless assets in a nation's financial system. (The author suggests several modifications that would alleviate this problem in some countries.) Second, the proposal might hurt the financial market by: (a) increasing interest rates for higher-risk borrowers, forcing them out of the market; and (b) transfering greater risk to the nonbank sector of the financial system, making it more susceptible to crisis. Although the proposal would benefit developing countries (more prone to banking instability) more than industrial countries, it would also be more difficult to implement in developing countries. And the adverse effects of the proposal would be felt more severely in the financial markets of developing countries than in industrial countries, which have deeper, more responsive financial markets.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1095.

    in new window

    Date of creation: 28 Feb 1993
    Handle: RePEc:wbk:wbrwps:1095
    Contact details of provider: Postal:
    1818 H Street, N.W., Washington, DC 20433

    Phone: (202) 477-1234
    Web page:

    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    in new window

    1. Robert J. Lawrence & Samuel H. Talley, 1988. "Implementing a fail-proof banking system," Proceedings 206, Federal Reserve Bank of Chicago.
    2. James Tobin, 1987. "The case for preserving regulatory distinctions," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 167-205.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1095. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.