Journal Article

Narrow banking meets the Diamond-Dybvig model

Abstract: A version of the Diamond-Dybvig model of banking is used to evaluate the narrow banking proposal, the idea that banks should be required to back demand deposits entirely by safe short-term assets. It is shown that the mere existence of an amount of safe short-term assets outside the banking system that exceeds banking system liabilities does not make the proposal either innocuous or desirable. In fact, despite such existence, using narrow banking to cope with banking system illiquidity eliminates the role of the banking system.

Keywords: Bank reserves;

Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Quarterly Review

Publication Date: 1996

Volume: 20

Issue: Win

Pages: 3-13