Remedy for Banking Crises: What Chicago and Islam Have in Common

22 Pages Posted: 17 Apr 2018

See all articles by Valeriano F. Garcia

Valeriano F. Garcia

Washington International Advisors - Washington DC Office; World Bank

Vicente Fretes Cibils

Inter-American Development Bank

Rodolfo Maino

International Monetary Fund (IMF)

Date Written: March 1, 2004

Abstract

We document banking system instability arising from a combination of fractional reserve requirements, deposit insurance and moral hazard by presenting several episodes of severe banking distress and crises in Asia. Following a framework of functional perspective suggested by Merton and Bodie (1993), we argue that one hundred percent reserves, “narrow banking,” provides a basis for banking reform and an alternative to reduce the likelihood of systemic financial crises. Both the narrow banking and the Islamic system (equity-based systems) provide more stability to a banking sector than a conventional banking system does. Moreover, the interlinkages of financial markets and the scope for instantaneous reversal of capital flows carry potentially huge systemic risks that could prove costly in terms of economic growth and welfare.

Suggested Citation

Garcia, Valeriano F. and Cibils, Vicente Fretes and Maino, Rodolfo, Remedy for Banking Crises: What Chicago and Islam Have in Common (March 1, 2004). Islamic Economic Studies, Vol. 11, No. 2, 2004, Available at SSRN: https://ssrn.com/abstract=3164171

Valeriano F. Garcia (Contact Author)

Washington International Advisors - Washington DC Office ( email )

4246 Warren St. NW
Washington, DC
United States

World Bank

1818 H Street, N.W.
Washington, DC 20433
United States

Vicente Fretes Cibils

Inter-American Development Bank ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Rodolfo Maino

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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