cover image: The Regulation of Private Money

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The Regulation of Private Money

30 May 2019

Financial crises are bank runs. At root the problem is short-term debt (private money), which while an essential feature of market economies, is inherently vulnerable to runs in all its forms (not just demand deposits). Bank regulation aims at preventing bank runs. History shows two approaches to bank regulation: the use of high quality collateral to back banks’ short-term debt and government insurance for the short-term debt. Also, explicit or implicit limitations on entry into banking can create charter value (an intangible asset) that is lost if the bank fails. This can create an incentive for the bank to abide by the regulations and not take too much risk.
financial institutions corporate finance financial economics monetary economics development of the american economy

Authors

Gary B. Gorton

Acknowledgements & Disclosure
Thanks to Bob DeYoung for comments and suggestions. Forthcoming in Journal of Money, Credit and Banking. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
DOI
http://dx.doi.org/10.3386/w25891
Published in
United States of America

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