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The Regulation of Private Money*
Author(s) -
GORTON GARY
Publication year - 2020
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12731
Subject(s) - collateral , debt , bank regulation , bank run , deposit insurance , business , demand deposit , financial system , issuing bank , open market operation , asset (computer security) , monetary economics , chinese financial system , finance , economics , monetary policy , payment , market liquidity , computer security , china , computer science , law , political science
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.