Limited-Purpose Banking—Moving from “Trust Me” to “Show Me” Banking | Zendy

Christophe Chamley | Zendy; Laurence J. Kotlikoff | Zendy; Herakles Polemarchakis | Zendy

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Limited-Purpose Banking—Moving from “Trust Me” to “Show Me” Banking

Author(s) -

Christophe Chamley,

Laurence J. Kotlikoff,

Herakles Polemarchakis

Publication year - 2012

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.102.3.113

Subject(s) - leverage (statistics) , creditor , business , finance , retail banking , economics , financial system , financial market , debt , computer science , machine learning

International audienceThere are many alleged culprits for the bank runs of 2008 and their devastating economic fallout. But proprietary information and leverage top our list. Claims of proprietary information forced financial markets to operate on trust, while providing the perfect breeding ground for fraud. And leverage permitted creditors to run at the first whiff of fraud, leveling one financial giant after another. Limited Purpose Banking (LPB), presented here, is a financial reform that sharply curtails proprietary information and eliminates leverage and, thus, the possibility of financial collapse. LPB's adoption is supported by our simple model showing how fraud can destroy finance

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