Limited-Purpose Banking--Moving from "Trust Me" to "Show Me" Banking

Christophe Chamley (), Laurence J. Kotlikoff and Heracles M. Polemarchakis
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Christophe Chamley: PSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Department of Economics - BU - Boston University [Boston]
Laurence J. Kotlikoff: Department of Economics - BU - Boston University [Boston]
Heracles M. Polemarchakis: Department of Economics - BU - Boston University [Boston]

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Abstract: There are many alleged culprits for the bank runs of 2008 and their devastating economic fallout. But proprietary information and leverage top our list. Claims of proprietary information forced financial markets to operate on trust, while providing the perfect breeding ground for fraud. And leverage permitted creditors to run at the first whiff of fraud, leveling one financial giant after another. Limited Purpose Banking (LPB), presented here, is a financial reform that sharply curtails proprietary information and eliminates leverage and, thus, the possibility of financial collapse. LPB's adoption is supported by our simple model showing how fraud can destroy finance.

Date: 2012-05
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Published in The American Economic Review, 2012, 102 (3), pp.113-119. ⟨10.1257/aer.102.3.113⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00812895

DOI: 10.1257/aer.102.3.113

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