Published by:
Harvard Business Publishing
Length: 13 pages
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Abstract
The natural franchise of banks is to provide a safe deposit for savers and to protect the payments system. Banks can only do this with government insurance. But government insurance, like any safety net, creates market distortions. To minimize them Washington should isolate government-insured banking from all other financial services. Noninsured banks should be free to compete and innovate, so long as they raise capital from the market and do not rely on safety nets.
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Abstract
The natural franchise of banks is to provide a safe deposit for savers and to protect the payments system. Banks can only do this with government insurance. But government insurance, like any safety net, creates market distortions. To minimize them Washington should isolate government-insured banking from all other financial services. Noninsured banks should be free to compete and innovate, so long as they raise capital from the market and do not rely on safety nets.