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The Role Of Banks By Barbara Casu Ppt License Open AccessWerner Show more Get rights and content Under a Creative Commons license open access Highlights The three theories of how banks function and whether they create money are reviewed A new empirical test of the three theories is presented The test allows to control for all transactions, delivering clear-cut results.The fractional reserve and financial intermediation theories of banking are rejected Capital adequacy based bank regulation is ineffective, credit guidance preferable This is shown with the case study of Barclays Bank creating its own capital Questions are raised concerning the lack of progress in economics in the past century Policy implications: borrowing from abroad is unnecessary for growth Abstract How do banks operate and where does the money supply come from The financial crisis has heightened awareness that these questions have been unduly neglected by many researchers.During the past century, three different theories of banking were dominant at different times: (1) The currently prevalent financial intermediation theory of banking says that banks collect deposits and then lend these out, just like other non-bank financial intermediaries.
The older fractional reserve theory of banking says that each individual bank is a financial intermediary without the power to create money, but the banking system collectively is able to create money through the process of multiple deposit expansion (the money multiplier). The credit creation theory of banking, predominant a century ago, does not consider banks as financial intermediaries that gather deposits to lend out, but instead argues that each individual bank creates credit and money newly when granting a bank loan. The theories differ in their accounting treatment of bank lending as well as in their policy implications. Since according to the dominant financial intermediation theory banks are virtually identical with other non-bank financial intermediaries, they are not usually included in the economic models used in economics or by central bankers. Moreover, the theory of banks as intermediaries provides the rationale for capital adequacy-based bank regulation. Should this theory not be correct, currently prevailing economics modelling and policy-making would be without empirical foundation. Despite the importance of this question, so far only one empirical test of the three theories has been reported in learned journals. This paper presents a second empirical test, using an alternative methodology, which allows control for all other factors. The financial intermediation and the fractional reserve theories of banking are rejected by the evidence. This finding throws doubt on the rationale for regulating bank capital adequacy to avoid banking crises, as the case study of Credit Suisse during the crisis illustrates. ![]() The question is considered why the economics profession has failed over most of the past century to make any progress concerning knowledge of the monetary system, and why it instead moved ever further away from the truth as already recognised by the credit creation theory well over a century ago. The Role Of Banks By Barbara Casu Ppt Free Academic ConsensusThe role of conflicts of interest and interested parties in shaping the current bank-free academic consensus is discussed. A number of avenues for needed further research are indicated. Previous article in issue Next article in issue JEL classification E30 E40 E50 E60 Keywords Bank accounting Bank credit Credit creation Economics Financial intermediation Foreign borrowing Fractional reserve banking Money creation Recommended articles Citing articles (0) The author would like to thank Mr. Marco Rebl and Mr. Michael Betzenbichler, directors of Raiffeisenbank Wildenberg e.G., for their interest, time and kind co-operation. Without them and Mr. Rebls ideas and suggestions the test reported in this paper would not have taken place. The author also wishes to thank Plamen Ivanov and Shamsher Dhanda for their capable research assistance. Many thanks to Professor Brian Lucey, the editor, and Dr. Duc Nguyen, the editor of the special issue, and to a capable anonymous referee for pertinent and helpful comments. Finally, should grains of wisdom be found in this article, the author wishes to attribute them to the source of all wisdom (Jeremiah 33:3). Copyright 2020 Elsevier B.V. ScienceDirect is a registered trademark of Elsevier B.V.
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