 Why Bank Money Creation?Hans Gersbach and Sebastian Zelzner No 17753, CEPR Discussion Papers from Centre for Economic Policy Research Abstract: We provide a rationale for bank money creation by comparing it to a system in which banks operate solely as intermediaries of loanable funds - a setup that could arise with the widespread adoption of stablecoins or the introduction of CBDCs. In a loanable-funds system, households impose leverage constraints on banks to ensure they retain sufficient “skin in the game†for diligent loan monitoring. However, if banks differ in their monitoring efficiency and this heterogeneity is unobservable, such discipline leads to inefficiently low aggregate lending. Bank money creation mitigates this inefficiency by allowing banks to extend credit without relying on prior deposit funding. With appropriately designed regulatory capital requirements, the gains from higher overall lending outweigh the losses from weaker monitoring incentives. These findings provide a clear justification for preserving the money creation privilege of banks. Keywords: Monetary system; Money creation; Loanable funds; Cbdcs; Stablecoins (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:17753 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK. |
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