Narrow banking reconsidered

April 28, 2014

Here’s an idea that makes sense on its surface:  to stop bank runs, we should limit the activities of banks and make them safer — what you might call “narrow banking.” Makes sense, doesn’t it? Steve Cecchetti and Kim Schoenholtz argue the opposite in their new blog: If banks are too tightly regulated, runs will simply move to other financial institutions and markets. That’s what we saw in the recent financial crisis, where runs occurred in money market funds and the repo market.

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