Deposit insurance, bank regulation, and narrow banking

Stephen Williamson

Journal of Economic Theory, 2024, vol. 219, issue C

Abstract: Narrow banking has surfaced frequently as a proposed framework for dealing with financial instability and inefficiency. Recent proposals include reforms intended to improve the implementation of monetary policy, and to deal with perceived problems related to stablecoins. A model is constructed in which banks must deal with three frictions: limited commitment, moral hazard with respect to risky assets, and potential misrepresentation of safe assets. Surprisingly, deposit insurance does not engender inefficiency, and government-imposed capital requirements and leverage requirements serve to reduce welfare. The viability of narrow banking depends on inefficient regulation in conventional banking, and narrow banking is never welfare-improving.

Keywords: Bank regulation; Deposit insurance; Narrow banking (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:219:y:2024:i:c:s0022053124000656

DOI: 10.1016/j.jet.2024.105859

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