Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/253697 
Year of Publication: 
2022
Series/Report no.: 
CFS Working Paper Series No. 678
Publisher: 
Goethe University Frankfurt, Center for Financial Studies (CFS), Frankfurt a. M.
Abstract: 
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 risksensitive capital requirements, can reduce or even eliminate such losses.
Subjects: 
monetary system
banking
money creation
loanable funds
capitalrequirements
leverage constraint
asymmetric information
moral hazard
CBDC
JEL: 
E42
E44
E51
G21
G28
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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