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Limited-Purpose Banking--Moving from "Trust Me" to "Show Me" Banking

Abstract : There are many alleged culprits for the bank runs of 2008 and their devastating economic fallout. But proprietary information and leverage top our list. Claims of proprietary information forced financial markets to operate on trust, while providing the perfect breeding ground for fraud. And leverage permitted creditors to run at the first whiff of fraud, leveling one financial giant after another. Limited Purpose Banking (LPB), presented here, is a financial reform that sharply curtails proprietary information and eliminates leverage and, thus, the possibility of financial collapse. LPB's adoption is supported by our simple model showing how fraud can destroy finance.
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Contributor : Caroline Bauer Connect in order to contact the contributor
Submitted on : Saturday, April 13, 2013 - 11:42:51 AM
Last modification on : Friday, April 29, 2022 - 10:12:58 AM

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Christophe Chamley, Laurence J. Kotlikoff, Heracles M. Polemarchakis. Limited-Purpose Banking--Moving from "Trust Me" to "Show Me" Banking. The American Economic Review, 2012, 102 (3), pp.113-119. ⟨10.1257/aer.102.3.113⟩. ⟨hal-00812895⟩



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