Ghosh, Saibal and Saggar, Mridul (1998): Narrow Banking: Theory, evidence and prospects in India. Published in: Economic and Political Weekly , Vol. 34, No. 9 (May 1998): pp. 1091-1103.
Download (332kB) | Preview
The narrow banking proposal defining a class of safe and liquid assets (generally sovereign Government securities) for investments by weak banks, backed fully by demand liabilities (generally non-interest bearing deposits) has been considered as a means of deposit protection and a possible solution to the banking problems. The paper seeks to explain the theoretical implications of the proposal and examine its implications for the Indian public sector banks facing large non-performing loans. The evidence presented shows that even without a directive, narrow banking on the asset side is already being practised as part of the asset-liability management by these banks. However, given the structure of deposit ownership, narrow banking in its strict sense does not afford a solution to reforming weak banks. Strictly practiced narrow banking can neither guarantee deposit protection not turn around the weak banks. On the contrary, it may expose weak banks to immense market and interest rate risks which can make the banking system vulnerable to idiosyncratic and systemic risks arising from macroeconomic shocks. The paper however recognises that some contraction in the scale of operations of weak banks seems to be an unavoidable by-product of measures which may be necessary to strengthen weak banks.
|Item Type:||MPRA Paper|
|Original Title:||Narrow Banking: Theory, evidence and prospects in India|
|Keywords:||Narrow banking; government securities; deposit insurance; India|
|Subjects:||G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages|
|Depositing User:||Saibal Ghosh|
|Date Deposited:||17. Sep 2009 09:14|
|Last Modified:||07. Jan 2014 20:20|
Ajit, D. and Bangar, R.D. (1997), ‘Banks in Financial Intermediation: Performance and Issues’, Reserve Bank of India Occasional Papers, Special Issue: June and September 1997, 303-349.
Bossone, B (2001), ‘Should Banks Be Narrowed?’, IMF Working Paper No.159. IMF:Washington.
Bruni, F. (1995) “Prudential Regulation in an Integrated Financial Market: Issues of Optimality and Credibility” in Ferrarini, G. (ed.) Prudential Regulation of Banks and Securities Firms: European and International Aspects, London: Kluwer Law International.
Caprio, G. and Summers, L.H. (1996) “Finance and its Reform: Beyond Laissez Faire”, in Papandimitriou, D.B. (ed.) Stability in the Financial System, Great Britain: MacMillan Press Ltd.
Caprio, G., I.Atiyas and J.A.Hanson (1994) Financial Reform: Theory and Experience, Cambridge: Cambridge University Press.
Diamond, D. and P.H.Dybvig (1983), ‘Bank Runs, Deposit Insurance and Liquidity’, Journal of Political Economy, 91, 401-419.
Dornbusch, R., and M. Draghi (1990), Public debt management: Theory and Evidence, Cambridge University Press: UK.
Dymski, G., G.Epstein and R.Pollin (1993), Transforming the U.S. Financial System: An Equitable and Efficient Structure for the 21st Century, M.E.Sharpe Inc.
Ely, B., (1991). The narrow bank: A flawed response to the failings of Federal Deposit Insurance, Regulation 14, 12-20.
Fernandez, R and L.Schumacher (1996), ‘Does Argentina Provide a Case for Narrow Banking?’, World Bank (mimeo).
Greenbaum, S.I and Thakor, A.V (1995), Contemporary Financial Intermediation, The Dryden Press, USA.
Honohan, P (1997), ‘Banking System Failures in Developing and Transition Countries: Diagnosis and Predictions’, BIS Working Paper No.39, Basle, Switzerland.
Kobayakawa, S. and H.Nakamura (2000), ‘A Theoretical Analysis of Narrow Banking Proposals’, Monetary and Economic Studies (Bank of Japan) 18, 105-118.
Lindgren, C.J., G.Garcia and M. Saal (1996), Bank Soundness and Macroeconomic Policy, IMF: Washington, D.C.
Litan R.E. (1987), What Should Banks Do? The Brookings Institution, Washington, D.C.
Mishkin, F.S. (1994), ‘Preventing Financial Crises: An International Perspective’, NBER Working Paper No.4636, NBER, New York.
Rangarajan, C (1997), Indian Economy: Essays in Money and Finance, UBSPD: Mumbai.
Reserve Bak of India (1997), Report of the Committee on Capital Account Convertibility (Chairman: Shri S.S.Tarapore), RBI: Mumbai.
Reserve Bank of India (1954), All-India Debt and Investment Survey, RBI: Mumbai.
Reserve Bank of India (1991), Report of the Committee on the Financial Systems (Chairman: Shri M.Narasimham), RBI: Mumbai.
Reserve Bank of India (1999), Harmonisation of the Role of DFIs and Banks: A Discusison Paper, RBI: Mumbai.
Wallace, N (1996), ‘Narrow Banking Meets The Diamond-Dybvig Model’, Federal Reserve Bank of Minneapolis Quarterly Review, Winter, 3-13.