46 Pages Posted: 11 Apr 2015
Date Written: April 2015
We show that a competitive banking system is inconsistent with an optimum quantity of private money. Because bankers cannot commit to their promises and the composition of their assets is not publicly observable, a positive franchise value is required to induce the full convertibility of bank liabilities. Under perfect competition, a positive franchise value can be obtained only if the return on bank liabilities is sufficiently low, which imposes a cost on those who hold these liabilities for transaction purposes. If the banking system is monopolistic, then an efficient allocation is incentive-feasible. In this case, the members of the banking system obtain a higher return on assets, making it feasible to pay a sufficiently high return on bank liabilities. Finally, we argue that the regulation of the banking system is required to obtain efficiency.
Keywords: Private Money, Banking Structure, Regulation
JEL Classification: E42, G21, G28
Suggested Citation: Suggested Citation
Monnet, Cyril and Sanches, Daniel R., Private Money and Banking Regulation (April 2015). FRB of Philadelphia Working Paper No. 15-19. Available at SSRN: https://ssrn.com/abstract=2592604 or http://dx.doi.org/10.2139/ssrn.2592604