Financial Innovations and Banking Reform: Implications for banking without deposit insurance

摘要

Although bank loans themselves are somewhat illiquid because of private information, most of their cashflows are not. Recent financial innovations allow commercial loans to be liquefied via credit derivatives and actual and synthetic securitizations. The loan originating bank holds the remaining illiquid tranche containing the concentrated credit risk, private information rent and the "excess spread"that incentivize the bank to continue to monitor and service the loans. Empirically, we find that the average size of the residual tranche is about 3%, which reflects the size of the "market determined capital"necessary to support the liquefaction. The liquefaction of bank loans makes possible a banking system that restricts the guaranteed accounts to be backed by 100% reserves and the non-guaranteed deposits to be backed by liquid securitized loan tranches, while retaining the deposit-lending synergy. Such a system is perfectly safe without deposit insurance and it renders banks bankruptcyremote without sacrificing a bank's traditional role as a financial intermediary.