Indirect Convertibility,Equity‐Based Banking and Financial Stability |
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Authors: | David Cronin |
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Affiliation: | Financial Stability Division, Central Bank of Ireland. Email: . The author would like to thank three referees, the Editor, and Kevin Dowd for their comments, and Frank Browne for discussion on this issue. The views expressed in the article are, nevertheless, those of the author and do not represent those of the Central Bank of Ireland or the European System of Central Banks. |
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Abstract: | Banking reform proposals put forward in the wake of the recent financial crisis maintain that equity‐based banking would be stable and would prevent bank runs. This article argues that complementing this form of banking with an indirect convertibility monetary standard and thereby dispensing with base money would enhance financial stability further. Banks would not hold a distinctive asset (base money) that would be called upon by customers at short notice, thereby removing the possibility of bank runs. No discrepancy in value between the two sides of a bank's balance sheet would arise as its assets (securitised loans) would be marked to market. Unlike other recent contributions, the intermediation model outlined here is not ‘limited purpose’ in nature as banks would not be restricted in the form of lending activity they can pursue. Common sources of banking and financial instability – liquidity risk, solvency risk, moral hazard – would be absent. |
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Keywords: | bank runs equity‐based banking monetary standards |
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