Large Systemic Banks and Fractional Reserve Banking, Intractable Dilemmas in Search of Effective Solutions

Chapter in Arner, Avgouleas, Buckley (eds), Reconceptualizing Global Finance and its Regulation (Cambridge University Press, New York, 2016)

47 Pages Posted: 12 Feb 2015 Last revised: 26 Apr 2016

See all articles by Emilios Avgouleas

Emilios Avgouleas

University of Edinburgh - School of Law

Date Written: February 9, 2015

Abstract

Banks have been a ubiquitous feature of economic life since at least the 18th century. Yet the transformation that banks have undergone in the past thirty years has made the struggle of making them safe ever harder and more challenging. Arguably, the notion of market discipline aiding financial stability in the financial sector is sometimes stretched to a breaking point for three reasons: inherently flawed corporate governance incentives, the (albeit now fading) possibility of a bailout, and complexity. This chapter intends to provide a balanced, all encompassing, and in depth discussion of the social utility of big banks in a fractional reserve banking system in the post-2008 context utilizing a very wide array of empirical and theoretical works. It will, thus, discuss the dilemmas surrounding the desired demolition of the Too-big-to-fail bank (TBTF) in the post-reform era. To this effect, the chapter will explain that while well calibrated structural reforms and special resolution regimes will certainly help to alleviate the TBTF problem in the banking sector they will not eliminate it.

Keywords: Fractional Reserve Banking, Narrow Banking, Too-Big-To-Fail, Bail-in, Bailouts, bank competition, structural reform, optimal bank structure, organization theory

JEL Classification: G18, G20, G21, K22, L20

Suggested Citation

Avgouleas, Emilios, Large Systemic Banks and Fractional Reserve Banking, Intractable Dilemmas in Search of Effective Solutions (February 9, 2015). Chapter in Arner, Avgouleas, Buckley (eds), Reconceptualizing Global Finance and its Regulation (Cambridge University Press, New York, 2016). Available at SSRN: https://ssrn.com/abstract=2562521

Emilios Avgouleas (Contact Author)

University of Edinburgh - School of Law ( email )

Old College
South Bridge
Edinburgh, EH8 9YL
United Kingdom

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