Private liquidity and banking regulation

Cyril Monnet and Daniel Sanches

No 12-11, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: The authors show that the regulation of bank lending practices is necessary for the optimal provision of private liquidity. In an environment in which bankers cannot commit to repay their creditors, the authors show that neither an unregulated banking system nor narrow banking can provide the socially efficient amount of liquidity. If the bankers provided such an amount, then they would prefer to default on their liabilities. The authors show that a regulation that increases the value of the banking sector?s assets (e.g., by limiting competition in bank lending) will mitigate the commitment problem. If the value of the bank charter is made sufficiently large, then it is possible to implement an efficient allocation. Thus, the creation of a valuable bank charter is necessary for efficiency

Keywords: Banks and banking; Regulation; Banking structure (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban and nep-dge
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Citations: View citations in EconPapers (3)

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