Working Paper: CEPR ID: DP17753
Authors: Hans Gersbach; Sebastian Zelzner
Abstract: We provide a rationale for bank money creation in our monetary system byexamining its merits over a system with banks as intermediaries of loanablefunds. The latter system could result when CBDCs are introduced. In theloanable funds system, households limit banks’ leverage when providingdeposits such that banks have enough “skin in the game” and monitorloans. When there is unobservable heterogeneity among banks with regardto their monitoring efficiency, aggregate bank lending is inefficiently low.A monetary system with bank money creation alleviates this problem, asbanks can initiate lending by creating bank deposits without relying onhousehold funding. With a suitable regulatory leverage constraint, thegains from higher bank lending outweigh losses from banks which are lessdiligent in monitoring. Bank-risk assessments, combined with appropriaterisk-sensitive capital requirements, can reduce or even eliminate such losses.
Keywords: bank money creation; monetary system; capital requirements; leverage constraint; asymmetric information; moral hazard; CBDC
JEL Codes: E42; E44; E51; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Households' limitations on banks' leverage (G21) | Inefficiently low aggregate lending (G21) |
| Banks' ability to create deposits (G21) | Greater lending capacity (G21) |
| Regulatory leverage constraints (G18) | Enhanced lending efficiency in the MC economy (E51) |
| Higher bank lending (G21) | Higher aggregate output (E23) |
| MC economy (E19) | Higher aggregate output (E23) |
| Regulatory authority implementing risk-sensitive leverage constraints (G28) | Improved outcomes (I14) |