Narrow Banking

George Pennacchi ()
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George Pennacchi: Department of Finance, University of Illinois, Champaign, Illinois 61820

Annual Review of Financial Economics, 2012, vol. 4, issue 1, 141-159

Abstract: This review discusses the history of narrow banks, reform proposals involving narrow banks, and theory and empirical evidence regarding whether narrow banks should play a more prominent role in the financial system. Prior to the early-twentieth century, US banks tended to be much narrower than they are today. Common modern banking practices, such as maturity transformation and explicit loan commitments, arose only after the creation of the Federal Reserve and the FDIC. My review of theory and empirical evidence finds it largely supportive of narrow bank reforms. Most importantly, a narrow-banking system could have huge advantages in containing moral hazard and reducing the overall risk and required regulation of the financial system.

Keywords: bank regulation; narrow banks; money market funds; finance companies; deposit insurance (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (10)

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