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Why bank money creation?

  • We provide a rationale for bank money creation in our current monetary system by investigating its merits over a system with banks as intermediaries of loanable funds. The latter system could result when CBDCs are introduced. In the loanable funds system, households limit banks’ leverage ratios when providing deposits to make sure they have enough “skin in the game” to opt for loan monitoring. When there is unobservable heterogeneity among banks with regard to their (opportunity) costs from monitoring, aggregate lending to bank-dependent firms is inefficiently low. A monetary system with bank money creation alleviates this problem, as banks can initiate lending by creating bank deposits without relying on household funding. With a suitable regulatory leverage constraint, the gains from higher lending by banks with a high repayment pledgeability outweigh losses from banks which are less diligent in monitoring. Bank-risk assessments, combined with appropriate risk-sensitive capital requirements, can reduce or even eliminate such losses.

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Author:Hans GersbachGND, Sebastian Zelzner
URN:urn:nbn:de:hebis:30:3-634174
URL:https://ssrn.com/abstract=4095335
DOI:https://doi.org/10.2139/ssrn.4095335
Parent Title (English):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 678
Series (Serial Number):CFS working paper series (678)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Language:English
Year of Completion:2022
Year of first Publication:2022
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2022/05/04
Tag:CBDC; asymmetric information; banking; capital requirements; leverage constraint; loanable funds; monetary system; money creation; moral hazar
Issue:This version: April 20, 2022
Page Number:62
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht