The Regulation of Private Money

Gary Gorton

No 25891, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Financial crises are bank runs. At root the problem is short-term debt (private money), which while an essential feature of market economies, is inherently vulnerable to runs in all its forms (not just demand deposits). Bank regulation aims at preventing bank runs. History shows two approaches to bank regulation: the use of high quality collateral to back banks’ short-term debt and government insurance for the short-term debt. Also, explicit or implicit limitations on entry into banking can create charter value (an intangible asset) that is lost if the bank fails. This can create an incentive for the bank to abide by the regulations and not take too much risk.

JEL-codes: G2 G21 (search for similar items in EconPapers)
Date: 2019-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mon and nep-pay
Note: CF DAE ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published as GARY GORTON, 2020. "The Regulation of Private Money*," Journal of Money, Credit and Banking, vol 52(S1), pages 21-42.

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