Narrow Banking

Posted: 4 Nov 2012

Date Written: October 2012

Abstract

This review discusses the history of narrow banks, reform proposals involving narrow banks, and theory and empirical evidence regarding whether narrow banks should play a more prominent role in the financial system. Prior to the early-twentieth century, US banks tended to be much narrower than they are today. Common modern banking practices, such as maturity transformation and explicit loan commitments, arose only after the creation of the Federal Reserve and the FDIC. My review of theory and empirical evidence finds it largely supportive of narrow bank reforms. Most importantly, a narrow-banking system could have huge advantages in containing moral hazard and reducing the overall risk and required regulation of the financial system.

Suggested Citation

Pennacchi, George G., Narrow Banking (October 2012). Annual Review of Financial Economics, Vol. 4, pp. 141-159, 2012, Available at SSRN: https://ssrn.com/abstract=2170927 or http://dx.doi.org/10.1146/annurev-financial-110311-101758

George G. Pennacchi (Contact Author)

University of Illinois ( email )

4041 BIF, Box 25
515 East Gregory Drive
Champaign, IL 61820
United States
217-244-0952 (Phone)

HOME PAGE: http://www.business.illinois.edu/gpennacc/

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