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Narrow Banking with Modern Depository Institutions: Is there a Reason to Panic?

Hugo Rodriguez Mendizabal ()

No 955, Working Papers from Barcelona Graduate School of Economics

Abstract: What would be the effect of imposing a 100 percent reserve require- ment to depository institutions? This paper contends that reserves do not compete with loans on the asset side of bank’s balance sheets. Thus, they only affect liquidity provision by banks indirectly through their impact on the cost of loan and deposit creation. This cost could be driven to zero if, as the Eurosystem does, central banks remunerated required reserves at the same rate of their refinancing operations. The paper argues that the crucial constraint imposed by a fully backed banking system is collateral availability by depository institutions.

Keywords: narrow banking; endogenous money; interbank market; bank solvency; liquidity; monetary policy (search for similar items in EconPapers)
JEL-codes: E4 E5 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2017-01
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