Economic Policy Papers  The "Banks" We Do Need  Services once
said to justify traditionally structured banks are now available
through more efficient, less risky financial vehicles  V. V.
Chari - Consultant Christopher Phelan - Consultant  Published
January 7, 2013   This Economic Policy Paper was originally
published in the December 2012 issue of The Region.   Banks are
prone to panic-induced runs due to their traditional structure
of short-term, unconditional liabilities and long-term, illiquid
assets. To avoid systemic crises caused by such panics,
governments tend to bail out failing banks. Traditional banking
systems thus impose external costs. Three major theoretical
benefits are often used to justify a banking system that relies
on short-term debt despite these costs: (1) maturity
transformation, (2) efficient monitoring of bank managers and
(3) facilitation of financial transactions. In a previous paper,
we argued that the first two justifications, while seemingly
compelling, actually suggest financia