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The Purpose of Banking
The Purpose
of Banking
Transforming Banking for Stability
and Economic Growth
ANJAN V. THAKOR
1
3
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Library of Congress Cataloging-in-Publication Data

Names: Thakor, Anjan V., author.
Title: The purpose of banking : transforming banking for stability and
economic growth /Anjan V. Thakor.
Description: New York : Oxford University Press, [2019]
Identifiers: LCCN 2018031498 | ISBN 9780190919535 (hardcover) |
ISBN 9780190919542 (updf ) | ISBN 9780190919559 (epub)
Subjects: LCSH: Banks and banking. | Banking law. | Economic development.
Classification: LCC HG1601 .T355 2018 | DDC 332.1—dc23
LC record available at https://lccn.loc.gov/2018031498
9 8 7 6 5 4 3 2 1
Printed by Sheridan Books, Inc., United States of America

To the latest inspirations for my higher purpose: Aiden and Lily.
Contents
Introduction: The Columbo Approach: A Bird’s-Eye View of the Book 1
ACT I. The Purpose of Banks: What Banks Do and Why
1. Money, Guns, and Lawyers: The Business of Banking 7
2. The Origins of Banking and the Services Banks Provide: Customers,

Investors, and Other Stakeholders 17
3. Out of Sight, Out of Mind? Off-Balance-Sheet Banking 33
ACT II. Bank Decision-Making and the Regulation of Banks:

Capital, Regulation, Purpose, and Culture
4. When Your Chickens Come Home to Roost: Bank Capital

Regulation and the Search for Financial Stability 51
5. Higher Purpose, Culture, and Capital: Is Banking on Culture

a Capital Idea? 69
ACT III. Banks and Markets: Interactions That Affect Stability and Growth
6. Financial System Architecture: Where Do Banks Sit in the

Financial System? 95
7. Changes in Banking over Time 105

viii Contents
ACT IV. Financial Crises: Causes, Effects, and Cures
8. Financial Crises and Banks: What Caused the Great Recession,

and What Were Its Effects? 117
ACT V. Reforming Banking and Looking Ahead: Improving Banking

and the Potential Interactions with Fintech
9. The Final Frontier: An Improved Banking System to Achieve

Financial Stability and Economic Growth 159
10. Closing Curtain: Should Banking Be Fundamentally Redesigned? 179
11. Summing Up and Looking Ahead: Fintech and Banking 203
Name Index 213

Subject Index 219
The Purpose of Banking
Introduction
The Columbo Approach

A Bird’s-E ye View of the Book
IN THE TYPICAL mystery novel, say an Agatha Christie classic like Murder on
the Orient Express, there is an intriguing mystery about whodunit, and you
have to wait until the end of the novel to find out. Well, this is not a mystery
novel. Rather, it is a synthesis of a large body of research in banking to answer
one of the most important questions: How do we design a banking system to
achieve the “right” balance between financial stability and economic growth?
That is, how do we get banks to help the economy grow, but without recur-
ring crises? You will not have to wait until the end of the book to find out the
answer. Instead, you will have it in this chapter.
If there is an analogy to a murder mystery, a more fitting one is to the TV
show Columbo. Invariably, the show tips the audience off to who the killer is
right at the outset. The rest of the show is then devoted to a discovery of how
Columbo found out who the killer was and how he went about proving it. So
it is with this book. I will give you the answer to the question above, as well as
the most important takeaways from the book in this chapter. The rest of the
book is devoted to how these conclusions can be reached by accessing the vast
body of research that has been done in the past three or four decades.
The Four Biggest Takeaways

Takeaway #1: A key to understanding how to develop a banking system
for economic stability and growth is first understanding the core economic
functions banks serve. There are three core functions:
1. Banks create funding liquidity and private money by gathering deposits

and lending money to borrowers who they screen, monitor, and develop
lending relationships with.
2 INTRODUCTION
2. Banks provide safekeeping services for valuables, maintain the confidenti-

ality of clients’ information, and develop trust.
3. Banks process different sorts of information that helps to reduce
contracting costs and costs of verification of cash flows, asset ownership,
and so on.
Takeaway #2: These core economic functions help to crystalize the higher
purpose of banks and their corporate culture. The banks’ clearly articulated
higher purpose should be built around the provision of these services, but not
in a conventional way. The purpose should be defined not in terms of an ec-
onomic transaction but in terms of a contribution. An authentic higher pur-
pose expresses the true intent of the bank in serving these core functions, but
it requires delivering these services in a way that exceeds the conventional ex-
pectations of the customer. It is thus a prosocial goal that transcends the usual
business goals of the bank but intersects with these goals, and it encourages
the development of a corporate culture that generates trust in the bank. When
the higher purpose is the arbitrator of all decisions, the culture of the bank is
continually reshaped to serve and exceed the changing needs of the customer.
Takeaway #3: In performing their core economic functions in accordance with
the higher purpose, banks engage in activities like depository services, relation-
ship lending, selling loan commitments and standby letters of credit, and secu-
ritization. These activities put banks on center stage within the overall financial
system, and thus banking stability and health also affect the health of financial
markets and the whole financial system. This has numerous implications:
1. Banks are crucial for economic growth.

2. Financial markets cannot be developed effectively without first
developing banks.
3. The centrality of banks makes it very tempting for politicians to influence
banking, and politics can contribute to financial crises.
4. The centrality of banks means that a sufficiently high number of bank
failures can generate financial crises that have significant effects on the real
sector (Main Street)—the 2007–2009 crisis cost the US economy $22
trillion.
5. The specter of such costs creates a powerful incentive for the govern-
ment to intervene to prevent financial crises or minimize the damage
they cause. Interventions include ex ante safety nets like deposit insurance
for financial institutions and bailouts of failing institutions. These safety
nets encourage these institutions to take excessive risks and be excessively
leveraged (too little equity capital). Many of these behaviors are due to
The Columbo Approach 3
deep-seated attributes of the corporate culture in some banks, a culture

that is not shaped by an authentic higher purpose for the bank’s existence.
Takeaway #4: Although extensive regulations seek to limit such risk-taking

behavior by banks, regulators tolerate undercapitalized and risky banks be-
cause they believe that there is a tradeoff between economic stability and
growth. Asking banks to keep more capital will make them safer, but it is
believed that it will be at the expense of economic growth because it will re-
duce lending and liquidity creation. However, this is a false tradeoff. Extensive
research points to the fact that we can get long-run stability as well as eco-
nomic growth if we:
• increase equity capital significantly in banks without burdening them

with onerous liquidity requirements
• strengthen bank culture and encourage it to be linked to an explicitly ar-
ticulated higher purpose that is prosocial, and
• develop a more integrated regulatory structure, keeping fintech develop
ments on the radar and permitting banks to integrate these developments
into their activities.
With these changes, banks will become more trusted by their counter
parties and taxpayers; they will create more liquidity, lend more, contribute
to higher long-term economic growth, and be less crisis-prone, leading to a
much lower exposure for taxpayers.
Recent Proposals to Fundamentally Reform Banking

In the wake of the 2007–2009 financial crisis, some countries (e.g., Iceland
and Switzerland) have recently contemplated a fundamental remaking of
banking. The proposals they have considered rest on the premise that the
crisis that led to the Great Recession was a liquidity crisis. So the proposals
seek to end the specter of bank runs and panics by changing banks themselves.
The proposed new system is one in which all bank branches would disap-
pear. All deposit gathering would be done by the central bank, which would
then distribute deposits to banks at a price determined by supply and demand
forces, subject to banks posting sufficient equity capital. The central bank
would be the counterparty for all depositors. Deposit insurance as presently
designed, bank bailouts, and bank-level liquidity requirements would all be
eliminated. Gone would be “liquidity crises” in which healthy (solvent) banks
fail because liquidity unexpectedly dries up.
4 INTRODUCTION
I explain that this proposal is a logical consequence of the research that

argues that a central problem in financial crises—including the 2007–
2009 crisis—is liquidity risk. In this view, liquidity risk arises from the
likelihood of massive deposit withdrawals from banks that are due to the
sudden liquidity needs of depositors and unrelated to the financial health
of the bank’s assets; nonetheless, these withdrawals can cause the bank to
collapse. Centralizing deposits at the central bank helps to address this risk
of bank runs. I then evaluate the pros and cons of this proposal in light of
the overall empirical evidence available and other considerations discussed
throughout the book.
The Future
The book closes with some thoughts about the potential impact of fintech
on banking. In particular, how will banks respond to blockchain technology,
cryptocurrencies, P2P lending, and other developments? In a nutshell, I do
not view these developments as threatening banking, but I do see them
changing the core economic functions of banks. One important way in which
this change will occur is that banks will become more integrated with the fi-
nancial market, and the lines delineating banks from the market will become
increasingly blurred. Another is that the provision of financial services will be-
come increasingly “decentralized” and customized to the needs of customers.
Their ability to engender trust with their customers and counterparties may
remain the last distinctive asset of banks. And the ability of banks to engender
trust will depend on their ability to articulate and implement an authentic
higher purpose.
ACT I
The Purpose of Banks

What Banks Do and Why
1
Money, Guns, and Lawyers

The Business of Banking
Introduction
Few outlaws are more notorious than Jesse James in the history of the Wild
West. In the annals of Minnesota banking is the story of how the James-
Younger gang, led by Jesse James, was nearly wiped out attempting a bold
daytime robbery of the Northfield First National Bank in 1876. The robbery
started in the classic manner depicted in countless movies—a gang rides into
town firing pistols, scaring people away and creating a diversion, while some
other gang members walk into the bank brandishing guns. On this fateful
day—September 7, 1876—however, one of the bank employees managed to
escape and sound the alarm, which led to the people in the town surrounding
the bank with guns blazing. In the aftermath, most of the gang was wiped out,
but the James brothers managed to escape.
The Minnesota Historical Society has a Northfield bank note from the
time of this raid. Signed by the bank cashier, G. M. Phillips, and bank presi-
dent, F. Goodsell, this note survived the raid.1 Such bank notes were a part of
the money supply then.
Why were the good folks of Northfield so determined to confront a dan-
gerous gang and risk their lives? Because banks matter for the lives of everyday
people. They provide a host of economic services, create money, and lubricate
economic growth. For bankers, this means that it matters not only what they
do but how what they do is perceived. As John Maynard Keynes put it:
It is necessarily part of the business of a banker to maintain appearances

and to profess a conventional responsibility, which is more than
8 THE PURPOSE OF BANKS
human. Lifelong practices of this kind make them the most romantic
and least realistic of men.
Perceptions shape the confidence people have in banks. And confidence

shapes their willingness to do business with banks. Not only must banks be
trusted by their customers and various other counterparties in terms of the
actions, but those they deal with should also have confidence in their financial
viability. Indeed, this is one of the fundamental conundrums of banking—
bankers can serve you only if you believe they will. A lot that happens in
banking depends on perceptions and confidence. But what do banks really
do? How do they serve you?
While “Lawyers, Guns, and Money” is a song by Warren Zevon from his
1978 album Excitable Boy, these are three things that go hand in glove with
banking. Not just today; they always have. Money is a much older creation than
guns, and banks were involved in the original creation of money. But money
has always attracted weapons of war, so the association of guns with money is
no surprise. And the centrality of banks in money creation and the payment
system typically invites banking regulations. Of course, regulations are laws,
and where there are laws, there are lawyers. And in some cases, politics too.
These literal interpretations aside, the phrase “lawyers, guns, and money”
is often used as an analog for resources in general. And this is where the cru-
cial economic role of banks comes in. They not only play a central role in
how resources are allocated in the economy but also help create resources.
This has been true for millennia. And while modern banks look very different
from their ancient ancestors, it is striking how much of the original DNA still
exists in modern banks. As we will see, this historical perspective is useful for
informing contemporary issues.
The Bright and Dark Sides of Banking

The people of Northfield bravely defended their bank because it provided
valuable economic services to them. But this bright side of banking is only
one side of the equation. Like the moon, banking has a dark side, too, and it
is most visible during financial crises.
After the Civil War, US banking grew rapidly. But then came the crisis
of 1873. It started with a stock market crash in Europe. European investors
began selling their investments in US railroads, and many American railroads
went bankrupt. As is typically the case, bankruptcies in the “real economy”
spilled over to banks, and they began to experience an increase in their risk of
Money, Guns, and Lawyers 9
insolvency. A big New York bank, Jay Cooke & Company, went bankrupt due
to its large investments in the now-troubled railroads. Shocked by the failure
of such a large bank, investors and depositors in banks panicked and began
withdrawing their money from other banks.2 Over one hundred banks failed
as a result. The New York Stock Exchange was closed for ten days. Credit
began to shrink dramatically. Factories were shuttered. Thousands lost their
jobs. The resulting economic pall lasted until 1879 in the United States, and
even longer in Europe.
Banking Is Old, But We Can’t Do Without It

Neither the value provided by banks nor the economic carnage that
accompanies banking crises is a new phenomenon. Some economic
historians tell us that banking predates even the invention of coinage.
Grain loans to farmers and traders by grain warehouses that evolved into
banks probably began around 2000 bce in ancient Egypt, Assyria, and
Babylon. Others claim that the Venetian goldsmiths in the fourteenth
century ce were the immediate predecessors of modern banks, and the
antecedents of these early banks can be found in the goldsmiths in Athens
around 700 bce, which is roughly the time coinage first came into ex-
istence.3 The first credit crisis apparently occurred in the fourth century
bce when Dionysius of Syracuse ordered that all metal coins be collected
under penalty of death, restamped one-drachma pieces as two drachmas,
and used his newly inflated coins to pay off his IOUs.4 So banks and finan-
cial crises have a long and hoary tradition.
But what about the state of banking today? While no one denies that
banks are still important in modern times, the spectacular development of
financial markets—especially in the United States—has led many to believe
that the importance of banks is fading. Indeed, many research papers were
written in the 1980s about the demise of banks, as mutual funds emerged
and drained deposits out of banks.5 Today people talk of Bitcoin and digital
currencies replacing the bank-dependent, fiat-currency-based payment sys-
tems we have and P2P platforms taking loan market share away from banks.
Nonetheless, we underestimate the importance of banks at our own peril.
This lesson was brought home to me forcefully in 2001–2002 when I was at
the University of Michigan. My colleague Anna Meyendorff and I worked
on a project (requested by the Central Bank of Romania) under the auspices
of the Davidson Institute to study the Romanian financial system and make
recommendations for reform.6
The prevailing wisdom at the time was that economies like Romania’s that
had recently made the transition from a Soviet-style, centrally planned ec-
onomic system to a free-market system ought to focus on developing their
stock and bond markets by establishing exchanges on which the formerly
state-owned companies could be traded. In other words, following the ex-
ample of the United States, which has deep and liquid securities markets, the
path to economic development lies in focus on developing such markets.
Romania had taken this advice and focused on the development of their
stock exchange in Bucharest, called RASDAQ, patterned after NASDAQ in
the United States. However, when we studied the Romanian financial system,
we found that it faced a number of challenges. It had weak corporate govern-
ance in (formerly state-owned) firms. It had weak banks that relied on fee in-
come but loaned little. This was in part because the banks felt they lacked the
skills to make risky loans that might have to be restructured later. The other
reason was that there was no securitization then, so some forms of lending—
like home mortgages—were just considered too illiquid and risky. Moreover,
even though the former state-owned enterprises were privatized and listed
on RASDAQ, most of them were not involved in raising capital. So corpo-
rate investment was low. Companies were not getting enough credit, and they
were not making up for that by capital market financing. Economic growth
was hindered because the financial system was not lubricating this growth.
Why was this transition to a free-market economy not flourishing?
The answer, we discovered, was simple—the banking system had not been
developed. It is wrong to focus on securities markets before developing a ro-
bust banking system. Markets do not work well without a strong banking
system. This is reminiscent of Adam Smith, who wrote in The Wealth of
Nations (1776):
That the trade and industry of Scotland, however, have increased very
considerably during this period, and that the banks have contributed a
good deal to this increase, cannot be doubted.
There is now extensive academic research that explains why financial

markets cannot function well without robust banks; I will discuss some of
it later. But what matters for now is that we concluded that banks had to be-
come the central focus of development, and we came up with a specific set of
recommendations to achieve this. This was Romania in 2002, and it is a story
we saw repeated in other former Soviet-bloc countries. Let us now turn to the
banks of today.
From the Old to the New: What Do the

Banks of Today Do and Affect?
Highgrove Partners is a family-owned landscaping business in Atlanta. It
provides commercial landscape, development, and water management to
property managers and owners. Its CEO, Jim McCutcheon, decided to do his
banking with Atlantic Capital. McCutcheon describes his relationship with
the bank as follows:
By now I’ve worked with Atlantic Capital on many things—real estate

loans, lines of credit, and equipment lines of credit. . . . I even went
through the challenging situation of buying out two partners, and
ACB worked through that with me.7
Like the experience of Hargrove Partners, today’s banks touch our lives
in many ways. They safeguard our money, allow us to write checks, give us
loans to buy houses and finance our businesses, enable us to use credit cards,
participate in securitizing loans of all kinds, buy the bonds that finance our
state and federal governments, and act as market makers in various securities.
Today’s banks are as essential to our daily lives as the roads we drive on and the
electronic devices we are addicted to.
This centrality of banking in our lives is time honored. In a report
submitted to the lord commissioners of trade for the foreign plantations
on January 9, 1740, Governor Richard Ward of Rhode Island wrote: “If this
colony be in any respect happy and flourishing, it is paper money and a right
application of it that hath rendered as so.”8
As the principal conduit for the creation and flow of paper money, banks
were an important part of economic growth in the eighteenth century. That
role is an important part of banking even today. But it is augmented by a
plethora of other economic functions that include off-balance-sheet activi-
ties like loan commitments and letters of credit, securitization, and others.
The core economic functions banks perform are threefold: (1) they create
funding liquidity (and money) by gathering deposits and developing lending
relationships; (2) they provide safekeeping services, protect the confidenti-
ality of their clients’ information, and engage in activities that require the trust
of their counterparties; and (3) they reduce transactions costs of contracting
by more efficiently processing various sorts of information and reducing veri-
fication costs of all kinds (e.g., verification of asset ownership, borrower cash
flows, etc.). As a result of these core functions, it is difficult to talk about
banking in isolation from the rest of the financial system, and we will talk
later about the architecture of the financial system and how banks fit into that.
It is because of their central role in economic activity that the real sector
experiences serious indigestion when the banking system has a hiccup. This
was brought home to us forcefully during the 2007–2009 financial crisis.
What began as defaults on US subprime mortgages grew into a fire that
ravaged the global financial system. Employment dropped, consumption
dropped, and companies cut back on investments. Research estimates put the
damage done to the US economy alone at between $6 trillion and $14 tril-
lion.9 These were the direct costs. When the estimated indirect costs—like
productivity losses and the costs of mortgage foreclosures—are taken into ac-
count, the General Accounting Office puts the losses at around $22 trillion.10
When banks bleed, we all do.
Of course, crises are not new. They are as old as banking itself. The first
banking crisis in the United States occurred in 1792. The first emerging market
crisis occurred in Latin America in 1825. Not only are banks are disrupted
by crises and thus more likely to fail during those times; crises are the fire in
which the shape of banking is itself forged.
Preventing Banking Crises

An enormous amount of research, both theoretical and empirical, has been
done on what causes financial crises.11 Less has been done on how to design
banking systems that are less crisis-prone. In fact, some believe that avoiding
financial crises may be impossible.
The problem then is not that we lack theories of what causes banking
crises. Rather, we probably have too many. Many of these are elegant and com-
plex, but the challenge is to find a parsimonious set of theories that explain
a large set of facts about crises and are also possible to test empirically. That
is, we would not only like them to explain what we have documented about
crises, but we would like these theories to predict things we do not know so
we can test them. Accurate predictions would give us greater confidence in
these theories, so we could take their policy implications more seriously.
Whether it is the lack of a dominant theory of financial crises that is
widely endorsed and fits the facts or it is our unwillingness to learn from the
vast amount of research about crises, our response to any financial crisis is
predictable. Politicians point fingers at greedy bankers, typically representing
newer parts of the financial system,12 then they pass new regulations—often
too many—to “solve” the problems that they think led to the crisis, and then
they complain about how banks behave by being innovative in getting around
the new regulations. “Never waste a good crisis” is a statement often used to
indicate that a crisis provides increased opportunities for politicians to enact
new rules and regulations. As we will see later, the ever-present potential for
the intrusion of politics into banking can severely limit the attractiveness of
many reform proposals.
Do these regulations work? Some do. Some don’t. Can we tell which will
work well and which will do more harm than good? How do we avoid this
reactive regulatory dynamic? How much does research help us here?
These are important questions. As we work on answering them, we will
begin to see a picture that emerges about what a healthy, relatively crisis-free
banking system would look like.
As a society, we value stability. It facilitates planning and encourages
individuals and corporations to invest. But achieving stability at the ex-
pense of economic growth is not always desirable. If it were, it would be
easy to simply restrict all our banks with insured deposits to be “narrow
banks” that can invest only in very safe assets like US Treasury securities.
This is akin to an individual planning for retirement. If all you care about
is stability, then you invest all your wealth in federally insured deposit ac-
counts and US Treasury bonds. But if you are also interested in the growth
of your wealth, then you have a blended portfolio that also includes riskier
securities like common stock and claims on real estate. So any theory of
financial stability must confront the stability-growth tradeoff. Moreover,
the theory should focus on the common elements that are found in most
crises and avoid the trap of being tailored to deal with those that were par-
ticular to the last crisis.
In discussing these issues, I will attach special importance to three
things: bank capital, bank culture, and bank higher purpose. Capital is a heavily
researched topic, so my task is relatively easy—I can borrow from that vast
body of knowledge. Bank culture is a newer topic, and much work remains to
be done. But increasingly, bank regulators are realizing the limits of their reg-
ulatory effectiveness and the need for a greater focus on culture to ensure that
banks maintain their role as trusted intermediaries. That is, there is growing
recognition that the trust of counterparties is an essential asset of banks, and
bank culture has to ensure that this trust is maintained. Nonetheless, issues
of bank culture have been alluded to over many past decades. Consider the
example of Jacob Franklin Butcher, known to most as Jack Butcher, who
built a financial empire in Tennessee and was the Democratic Party nominee
for governor of Tennessee in 1978. He was convicted of banking fraud after
pleading guilty in 1985; he got a twenty-year prison term. The New York Times
(September 6, 1984) reported:
Eighteen months after the collapse of the Butcher brothers’ Tennessee

banking empire, the Federal Deposit Insurance Corporation fears that
its losses on the episode may total several hundred million dollars more
than it initially expected. . . .
The agency also said it found that the Butchers had been shifting
bad loans from bank to bank to keep regulators from noticing them.
On Valentine’s Day 1983, Tennessee had the F.D.I.C. arrange the sale of
Jack Butcher’s flagship, the United American Bank of Knoxville, and
the unraveling began.
The following month, C. H. Butcher’s Southern Industrial Banking
Corporation, a consumer finance company that attracted uninsured
deposits by paying high interest rates, filed for protection from creditors
under Chapter 11. . . . In May 1983, the F.D.I.C. sold five more Tennessee
banks that were owned or formerly controlled by the Butchers.
. . . Since then, nine more Tennessee banks have failed at least in
part because of problems related to the Butchers.
These kinds of bank failures are not just due to bad luck. Rather, they re-
flect systematic failures of culture that jeopardize the trust taxpayers place in
the banking system.
Finally, there is the issue of higher purpose, a reason for the bank to
exist—typically a prosocial goal—that transcends typical business goals but
intersects with these goals. This is an issue of great import, but one that has
received little attention from banks, and even less in research.13 When an or-
ganization has higher purpose, decisions are made that are in line with both
prosocial goals and the business goals. A higher purpose expresses the deepest
authentic intent of the organization. Steve Jobs described it thus:
Great companies must have a noble cause. Then it is the leader’s job to
transform that noble cause into such an inspiring vision that it will at-
tract the most talented people in the world to want to join it.
Higher purpose is not charity or corporate social responsibility. These

terms mean different things to different people, but to me they are distinct
from an authentic (not PR), organizational higher purpose.
What should a bank’s higher purpose be? Since we are interested in how
the bank makes decisions at the intersection of its business goals and its
higher purpose, this question is difficult to answer until we understand what
banks do and why they do it. That is, we first need a deeper understanding of
the business of banking. After these ideas have been established, I will return
to a discussion of how higher purpose interacts with bank culture and the role
it can play in financial stability.
Notes
1. See Nicholson 2000–2001.
2. Banks runs are typically triggered by worries about economic fundamentals. That
is, they are not completely random phenomena, but are caused by observed eco-
nomic stresses caused by things like asset price declines, loan defaults, layoffs, and so
on. In 1873, this shock to fundamentals came from bankruptcies in the real sector.
More generally, bank runs are typically triggered by a decline in the values of assets
banks hold on their balance sheets due to stresses in the real sector. In the 2007–
2009 crisis, this decline was in the values of home mortgages and mortgage-backed
securities due to falling house prices.
3. See Donaldson, Piacentino, and Thakor 2018.
4. See Reinhart and Rogoff 2009.
5. See, for example, Gorton and Rosen 1995.
6. See Meyendorff and Thakor 2002.
7. See the website of Atlantic Capital: http://www.atlanticcapitalmanagement.
com/.
8. See c hapter 2 in Mayer 1975.
9. See Atkinson, Luttrell, and Rosenblum 2013 and Thakor 2015.
10. See General Accounting Office 2013. The Bank for International Settlements
estimates that a typical crisis costs 158% of the nation’s GDP.
11. See Thakor 2015.
12. See “Financial Crises” 2014.
13. See Quinn and Thakor 2018.
References
Atkinson, Tyler, David Luttrell, and Harvey Rosenblum. 2013. “How Bad Was It? The
Costs and Consequences of the 2007‒09 Financial Crisis.” Staff Papers 20, Federal
Reserve Bank of Dallas, July.
Donaldson, Jason, Giorgia Piacentino, and Anjan V. Thakor. 2018. “Warehouse
Banking.” Journal of Financial Economics 129:250–267.
General Accounting Office. 2013. Financial Regulatory Reform: Financial Crisis Losses
and Potential Impacts of the Dodd-Frank Act. Report to Congressional Requesters,
January.
“Financial Crises.” 2014. Economist online, April.
Gorton, Gary, and Richard Rosen. 1995. “Corporate Control Portfolio Choice, and the
Decline of Banking,” Journal of Finance 50 (5):1377–1420.
Mayer, Martin. 1975. The Bankers. New York: Weybright & Talley.
Meyendorff, Anna, and Anjan V. Thakor. 2002. Designing Financial Systems in
Transition Economies: Strategies for Reform in Central and Eastern Europe.
Cambridge, MA: MIT Press.
Nicholson, Claudia, J. 2000–2001. “Bankers with Shotguns and Other Minnesota
Banking Stories.” Minnesota Historical Society (Winter): 183–197.
Quinn, Robert, and Anjan V. Thakor. 2018. “Creating a Purpose-Driven Organization.”
Harvard Business Review, July–August, 2–9.
Reinhart, Carmen, and Kenneth Rogoff. 2009. This Time Is Different: Eight Centuries
of Financial Folly, Princeton, NJ: Princeton University Press.
Smith, Adam. 1776. An Enquiry into the Nature and Causes of the Wealth of Nations.
London: W. Strahan & T. Cadell.
Thakor, Anjan, V. 2015. “The Financial Crisis of 2007–09: Why Did It Happen and
What Did We Learn?” Review of Corporate Finance Studies 4 (2):155–205.
2
The Origins of Banking and

the Services Banks Provide
Customers, Investors, and Other
Stakeholders
From Warehouses to Banks

In The Daily Life of Christians in Ancient Rome, James Ermatinger writes of
Rome in the third and fourth centuries:
The Aventine, named for the Aventine Hill, was the chief river port
of Rome, since the river traffic coming up the Tiber from Istia would
unload its wares there. . . . The shore line, dotted with numerous
docks and granaries, offices and warehouses, became the great granary
for Rome and the commercial and government distribution source.
Here grain, wine, olives, and olive oil contained in amphorae were
unloaded. . . . The amphorae were unloaded where the customs of-
ficer, a government accountant, removed two stamped handles of each
amphorae, one handle staying at the office where they were counted
and divided into separate piles for each shipper, the other handle acting
as a receipt for the buyer. . . . For large shipments the bullion remained
in Rome and was merely credit from one account to another, much the
way modern commodity brokers work.1
But this function of warehouses predates by centuries the Roman

warehouses. In Genesis, there is a description of Joseph being appointed by
the Pharaoh in Egypt in 1707 bce to provide grain warehouses all over the
land and levy a tax on all farm products during the seven years of plenty.2
This was meant to insure against the prophesied seven years of famine.
These warehouses were located in the cities and designated “the king’s
warehouses.”
It was from these ancient warehouses that banks originally evolved. The
story of this evolution goes something like this: Say a farmer has some grain
that needs to be stored safely. Because storage has huge economies of scale, it
is better for the farmer to store his grain in the king’s warehouse—where the
likelihood of theft is low—than in his own farmhouse. The farmer will pay
the warehouse a fee and get a receipt as proof of deposit. In some instances,
the farmer had no choice but to deposit in the King’s warehouse because that
is how he was taxed (equivalent to a storage fee). If the farmer then needed to
purchase services—say labor to till the fields—he could go to the warehouse,
withdraw some grain, and pay the workers. Indeed, in ancient Egypt, grain
formed the most extensively used medium of exchange, even after coinage
was introduced.
Over time, people realized that going back and forth to the warehouse to
withdraw grain was inefficient. Instead of giving grain to pay for purchased
services, the farmer could simply give some of his grain receipts. These receipts
were “payable to the bearer upon demand,” that is, they did not bear the
farmer’s name. Consequently, they could be “cashed” by anyone the farmer
gave them to. These warehouse receipts effectively became private money.3 See
figure 2.1.
Even though private money was created this way, these warehouses
were not banks. That transformation had to await a breakthrough. The
Warehouse
Warehouse receipts
issued as “proof” of
deposit
Depositors bring
grain or gold bricks
to warehouse.
Figure 2.1 Warehouses Create Private Money.
The Origins of Baking and the Services Banks Provide 19
warehouse manager realized that there was not much happening to the
inventory of grains, other than new deposits; withdrawals were limited.
This is where the warehouse manager had a brilliant insight. Why not
write additional receipts—those with no grain deposits to back them—
and lend them to those in need of “private money”? We can call these “fake
receipts,” because they are not issued in response to actual grain deposits,
but they are indistinguishable from deposit-backed receipts and are every
bit as authentic as those receipts in terms of payments and settlements.4
There will now be more warehouse receipts in circulation than grain, so
the warehouse will be in trouble if everyone decides to withdraw grain at
the same time. But absent that remote possibility, the warehouse will have
enough grain to meet withdrawals, as long as too many fake receipts are
not created.5 See figure 2.2.
This issuance of fake receipts has numerous important implications.
First, it means that the warehouse bank allows individuals and companies
to consume and invest more at any given point in time than the entire
endowment of the economy. That is, if we imagine everything every-
body owns in the economy is either deposited, consumed, or invested,
the fact that the fake receipts are leading to additional investments means
that money has essentially been created out of thin air. We call this
funding liquidity creation—banking expands the resources available for
investment (or consumption) beyond what the economy has on its own
without banks.
Borrowers
investing in
Fake projects
Warehouse BANK
warehouse
receipts receipts
Depositors
Figure 2.2 Fake Warehouse Receipts and Banking: Warehouse Becomes a Bank.
Key: Receipts are “payable to bearer upon demand” (i.e., name of depositor is not there ⇒ fake
and authentic receipts are identical).
Second, most people think of a bank as an entity that takes in deposits

and then invests these deposits in loans. That is, deposits create loans. This is
a very literal way of thinking about the process. I deposit $100 in bills in the
bank, and the bank then lends this $100 to you. This is a process that does
happen in practice, of course. But it is dwarfed in many countries by the pro-
cess described here, which shows that loans also create deposits. That is, when
the bank lends fake receipts to farmers and merchants, in its books it has to
record an offsetting deposit liability in recognition of the fact that if the fake
receipt is presented for deposit withdrawal, it must be honored. In other
words, when you go to the bank to request a $100 loan, the bank does not lit-
erally reach into its vault and pull out $100 in bills to hand to you. Rather, the
bank creates a deposit account for you (either in that bank or any other bank
of your choice) and credits that deposit account with $100. Thus, its $100
loan to you creates a $100 deposit. This somewhat unfamiliar notion of loans
creating deposits was recognized by John Maynard Keynes many decades ago:
It is not unnatural to think of deposits of a bank as being created

by the public through the deposits of cash representing either sav-
ings or amounts which are not for the time being required to meet
expenditures. But the bulk of the deposits arise out of the actions of
the banks themselves, for by granting loans, allowing money to be
drawn on an overdraft or purchasing securities, a bank creates a credit
in its books which is the equivalent of a deposit.6
Third, this shows that the private claims created by banking can func-
tion without fiat currency issued by the government. As you can see, this
process of lending by creating deposits leads naturally to “fractional reserve
banking.” Indeed, the invention of fractional reserve banking—wherein the
bank always has liquidity on hand to meet deposit withdrawals that is less
than its deposit obligations—was not dependent on the invention of coinage.
Interestingly, some of the earliest recorded laws pertaining to banks were part
of the code of Hammurabi in ancient Mesopotamia. The deposits in these
ancient warehouse banks were cattle, grain, and precious metals. However, a
banking system in which credit transfers occurred was probably introduced
during the Ptolemaic era (323–30 bce) in Egypt.
Fourth, it was not a coincidence that these ancient banks were the “king’s
warehouses” or located near temples and other places of power and influence.
Such locations gave these banks an added aura of being safe havens for storing
valuables, by either the force of the royal army or the presence of God. This
generated trust in banks. The consequence was an advantage for people to use
these as the places to store valuable commodities. As we will see, this advan-
tage was critical to the emergence of the warehouse as banks. It is an advan-
tage that is of pivotal importance to banks even today.
How Many Fake Receipts?

If a bank can create money out of thin air by printing fake receipts and lending
them out, in this case to farmers, why not do it ad infinitum? Some might
think that it is the fear of losing credibility and risking a run on the bank that
keeps the bank from creating excessive amounts of private money. This may
be so, but there is another powerful deterrent—incentive compatibility. This
means the number of fake receipts issued by the bank and loaned to farmers
must be compatible with the incentives of these farmers to repay the loans.
Imagine a world in which the borrowers cannot reliably pledge their output
(say, harvested grain or olives) to repay the loan. This may be because they
can simply hide it from the bank. What then would induce them to repay
their loans?
This question is similar to a question a student once asked me when I was
teaching a banking course: “If people deposit all their money with the bank,
why does the bank do all the hard work of operating the bank? Why not just
take the money and run?” This is similar to asking why a borrower would ever
bother to repay the bank.
The borrower’s repayment incentive arises from his need to continue to
have access to the bank. If the borrower were to harvest his grain, after having
taken a bank loan to pay his workers, then he must decide where to store the
grain. If the output is deposited in the warehouse bank, it can be seized by the
bank as repayment for the loan. On the other hand, keeping the output away
from the warehouse can allow the borrower to avoid repaying the loan. But
this comes at a cost. The borrower can no longer make use of the safekeeping
services offered by the warehouse. If the advantage of the warehouse over pri-
vate storage is big enough, the borrower will prefer to deposit his output with
the bank and repay the loan. This puts an upper bound on how big a loan the
bank can make to the borrower using fake receipts.7 One can solve mathe-
matically for exactly the number of fake receipts that can be loaned out be-
fore the borrower will default with certainty.8 Thus, the system has its own
checks and balances, and just the right amount of liquidity is created through
private money.
Whither Fiat Money?

Just as private money existed side by side with fiat money (coins) in ancient
Egypt, so it does today as well. There are actually many forms of money today.
The paper currency and coins we use are “fiat money,” since they are legally
acceptable by government fiat and have value because they are accepted in
payments. The check you write that instructs your bank to pay from your de-
posit account is another form of money. Our financial system creates money
in a variety of ways. See table 2.1.
Money has value because people believe it has value. At the top of the hier-
archy is fiat money, the most liquid form of money with the most credibility in
the sense that the assets backing the claims have the lowest likelihood of default.
Table 2.1 Hierarchy of Money Claims in the Economy
Money or money-like Assets backing the claim

claim issued
Central bank Currency in circulation Treasury bills (federal

and bank reserves government debt), agency
(liabilities of central debt, and residential mortgage-
bank) backed securities (RMBS)
Depository Insured deposits Loans and deposit insurance
banks issuing (liabilities of commercial
insured deposits banks)
Dealer banks Repurchase agreement or Collateralized by corporate
repos (liabilities issued bonds, asset-backed securities,
by dealers’ credit trading and private-label RMBS
desks)
Money funds Constant net asset value Commercial paper, Treasury
(NAV) shares. bills, and other short-term
assets
Depository banks Uninsured deposits Loans and securities
issuing uninsured
deposits
Source: Thakor 2015b.

How Does Money Creation Interact with Lending?

Banks act as warehouses for valuables, including things that serve as a me-
dium of exchange (grain, olives, fiat money). This is true even today. Banks
are not only depositories but also trusted custodians who provide safekeeping
services. They are also experts in screening borrowers and lending.9
This lending expertise evolved quite naturally from the warehousing
function. The bank creates liquidity only when it lends fake receipts to
borrowers. Just the act of opening a deposit account for a borrower does not
create liquidity. That is merely the warehousing function. It is important, but
it is not banking.
Banking arises when liquidity is created, not just when liquidity is stored
safely. This necessarily involves lending. So lending is an essential part of
the liquidity creation that is the raison d’être for the bank. We sometimes
use the term “qualitative asset transformation” to describe what the bank is
doing—on the asset side it has illiquid loans, and on the liability side it has
liquid deposits. But, of course, lending is typically risky. Even creditworthy
borrowers default sometimes. And some are not even creditworthy.
Given the centrality of risky lending to banking, it is no surprise that over
time, banks developed specialized expertise in managing this risk by screening
borrowers to identify the creditworthy borrowers, monitoring those who
are given credit, and designing loan contracts with covenants and collateral
provisions to limit credit risk. In the process of managing these risks, they also
developed expertise in processing a wide range of credit-related information
and in verification of cash flows, asset ownership, and contract compliance, so
as to reduce the transactions costs of contracting.10
Because banks developed information processing expertise, they also rou-
tinely acquired sensitive (confidential) information about their customers.
Therefore, it became essential for them to become trusted by their clients and
other counterparties to protect the confidentiality of this information.11 Trust
evolved inevitably as a central attribute for banks to focus on.
This perspective also highlights the fact that research that focuses on only
the liability or asset side of the bank’s balance sheet misses the important link
between the bank’s warehousing function (deposits) and its liquidity creation
(lending fake receipts). Any policy discussion that does not simultaneously
consider both sides of the bank’s balance sheet runs the risk of being mis-
guided.12 The magnitude of liquidity created by banks is huge. For example,
research shows that in 2003 US banks created over $2.84 trillion in liquidity.
It was 39 percent of bank total assets. Every dollar of bank equity capital was
associated with $4.56 of liquidity creation.13 In 2017, the total assets of the US
banking system were about $16.711 trillion, so applying the 39 percent to this
number gives liquidity creation of about $6.517 trillion.
This view of lending-based liquidity creation by the bank is not the way
most of the existing research views liquidity creation in banking. The dom-
inant view is that banks create liquidity by providing risk-averse depositors
with insurance against uncertain future liquidity needs.14 A simple way to see
the argument is this: You have $100 today, and if you invest it, you will get
$120 in a year. You are not sure whether you will need money in six months
or in a year. If you need it in six months, you have to liquidate your invest-
ment and recover $100. So you get to either consume $100 in six months or
$120 in a year. What a bank can do is ask you to deposit the $100 now and
promise to give you, say, $106 if you withdraw in six months and $110 if you
withdraw in a year. Your consumption stream (106, 110) is “smoother” than
(100, 120) without a bank, so you are better off with a bank, because your risk
is lowered. A deposit contract is considered liquid because it gives you instan-
taneous access to liquidity. Improved risk sharing is viewed as being synony-
mous with liquidity creation.
This view of bank liquidity creation is very different from what I have
described as lending- based liquidity creation. In this risk- sharing view,
banking does not expand the investable resources of the economy beyond
the endowment of the economy. A second difference is that with warehouse
banking, loans create deposits, whereas in the risk-sharing (consumption in-
surance) views, deposits create loans.
To sum up, banks serve three core economic functions, as shown in
figure 2.3.
Banks
Provide Process information

Create funding
safekeeping and to reduce contracting
liquidity
develop trust and verification costs
• Gather deposits • Provide safekeeping • Process various types of

• Screen and monitor of valuables information
borrowers • Maintain • Reduce transaction
• Develop lending confidentiality of costs of contracting for
relationships clients’ information clients
• Create private money • Develop trust • Reduce verification costs
Figure 2.3 What Banks Do.

At this point, the casual observer might say: “Wait, I know banks do a lot
more. They make loan commitments, provide market making services, act as
counterparties in swap contracts, and so on.” True. But, as we will see later
in this book, the three main economic functions I have listed will suffice to
develop a coherent argument for how to achieve growth-friendly banking
stability.
Banking Is Not a One-Night Stand:

Relationship Lending
Every company knows the value of customer loyalty. Having repeat busi-
ness from your customers is a great thing. For most companies the reason for
this is that it is costly to acquire new customers. This is why airlines, cruise
ships, and hotels have customer loyalty programs that reward customers with
greater benefits the more business they do with the company.
For banks there is an added benefit of customer loyalty in its lending busi-
ness. The longer the relationship of the borrower with the bank, the more the
bank learns about the borrower, and this knowledge can be used in subsequent
contracts with the borrower. Economists call this “intertemporal information
reusability.”15 Simply put, it means that, unlike a scoop of ice cream, which
disappears when you eat it, the same information can be consumed or reused
time and again without diminishing its value. Having done credit analysis on
the borrower once and having observed the borrower’s behavior on the first
loan, the bank has a lot less work to do when it lends to the borrower again.
This provides the bank with a big advantage over new lenders who might wish
to lure the borrower away. After all, the incumbent bank now knows “for free”
what competing banks have to invest to learn. This repeated interaction be-
tween the bank and the borrower is called “relationship lending.”
Relationship lending has interesting consequences.16 One is that as the
bank learns more about the borrower, the terms of lending may become better
over time for borrowers. Another is that borrowers who start out getting only
secured loans may over time be able to switch to unsecured loans. This is ben-
eficial for the borrower because it frees up collateral that can be used to sup-
port other types of financing.17 Finally, because the relationship is valuable
for both the bank and the borrower, both have incentives to behave better
in order not to jeopardize the relationship. The borrower is less likely to take
actions that may hurt the bank, and the bank is less likely to engage in exploit-
ative pricing to fleece the borrower.
From What Banks Do to How It All Breaks Down:

Stakeholders and Financial Crises
In the fall of 2007, Sam Smith was a young aspiring assistant professor of fi-
nance at a lending business school in the United States. He had been an as-
sistant professor for two years and was struggling with the disappointment of
his papers being rejected by the top journals. Then came the financial crisis.
All of a sudden, Sam found himself engaged in conversations with his
colleagues and students about the crisis. Every conversation raised questions
no one knew the answers to. How did this happen? What are its effects? What
are the magnitudes of the effects? What kind of crisis is this—a liquidity or
an insolvency crisis? What should the government do in the short run and in
the long run?
As the questions grew, Sam felt a strange sense of excitement. If every-
body is so interested in the answers, why not start doing research on these
questions? Over the next five years, Sam completely switched his research
agenda to addressing a host of interesting questions about the crisis. There
seemed to be no end to the ideas one could explore. A whole new continent
of opportunities had opened up. He found great success in publishing his pa-
pers, and his career took off.
This story is fictitious. But I know many whose research careers were
boosted by the research they did on the crisis. It is a fact that the financial
crisis generated a plethora of fascinating research questions that many young
scholars attacked with creativity and vigor. A large number of excellent books
and research papers have been written on the subject.18 The body of knowl
edge is indeed very rich.
In light of this vast body of knowledge, why do we need to revisit the issue
of what banks do and how they do it? The answer is suggested by the fol-
lowing quote from Ben Bernanke:
In the analysis of the crisis, my testimony before the Financial Crisis

Inquiry Commission drew the distinction between triggers and
vulnerabilities. The triggers of the crisis were the particular events
or factors that touched off the events of 2007– 09— the proxi-
mate causes, if you will. Developments in the market for subprime
mortgages . . . were a prominent example of a trigger of the crisis. In
contrast, the vulnerabilities were the structural, and more funda-
mental, weaknesses in the financial system and in regulation and su-
pervision that served to propagate and amplify the initial shocks.19
To understand the fundamental structural weaknesses in the financial

system—at whose epicenter banks sit—we need to focus on the core eco-
nomic activities of banks, how the very performance of these activities set in
motion the forces that generate financial crises, how regulation then attempts
a correction, and how this in turn reshapes the economic activities banks en-
gage in and the services they provide, as shown in figure 2.4.
The point of figure 2.4 is simple. It is the very nature of the services that
banks provide (and the reasons why they exist) that leads to these institutions
being crisis-prone. And a crisis invariably invites new regulation, which in
turn changes banking. This is the sense in which a crisis is the fire that not
only threatens the existence of banking but also forges its very shape. Without
starting with why banks exist and the services they provide, it is extremely
challenging to think of ways to enhance banking stability. So it is useful to
start with the first box in figure 2.4.
For now, I want to stress one point. The warehousing function of banks
defines three groups of stakeholders: customers who finance the bank,
customers who receive financing from the bank (borrowers), and investors.20
The bank’s depositors represent customers who finance the bank; banks are
unusual in that a lot of their financing comes from their customers. Financing
also comes from investors—shareholders and bondholders. A key distinc-
tion between these two groups of financiers that was emphasized by Robert
C. Merton21 is that investors are willing to bear the credit risk associated
with the bank and they reflect it in the pricing of the bank’s securities, but
customers (depositors) are unwilling to bear this risk. This means that they
will rush to withdraw their deposits as soon as there is even a whiff of elevated
credit risk in the bank.
Banks rely on deposit funding to a large extent—deposits account for
70 percent or more of a bank’s total funding typically. So a precipitous de-
cline in this funding can bring down the bank. This is costly to society for
various reasons, one of them being relationship lending. When a bank shuts
down due to failure, the information it has about its relationship borrowers
is lost. Even if these borrowers can go to other banks, they are likely to get
less credit, because these new banks lack the information the failed bank had
about them. The specter of such losses encourages regulatory protection of
banks—things like deposit insurance and other safety nets.22 But once these
safety nets are in place, they generate structural incentives for banks to take
greater risks.23 These risks can then lead to overinvestments in risky assets,
excessive leverage, and asset price bubbles—a potent admixture for igniting
a crisis. What research has shown is that an important way to diminish these
Bank Services Regulation to Restrict
Regulatory Excessive Financial
and Why Banks’ Activities and
Protection Risks Crisis
Banks Exist Prevent Future Crises
• Funding liquidity • Regulatory • Regulatory • Many banks fail

creation with deposit- protection protection distorts together.
taking and lending enhances value bank behavior. • Widespread
• Safekeeping and created by these • Banks become bailouts
protecting confidential services. excessively
information of leveraged and
customers risky.
• Reduce transaction
(including verification) Reshaping of Bank Services and Why They Exist
costs of contracting
Figure 2.4 The Existence-Failure-Regulation Cycle in Banking.

risk-taking incentives is by asking banks to keep more equity capital. Better-

capitalized banks are safer and have stronger incentives to develop a safety-
oriented culture.24 Such banks are thus better at earning the trust of their
counterparties. Opponents of higher capital in banking would say that this
will sacrifice economic growth.
Banks and Society

What we have discussed thus far gives us a glimpse of how banks fit into so-
ciety at large. The various actors in the drama are banks and their shareholders,
households who are both depositors and borrowers of banks, businesses who
depend on bank credit for their operations, central banks that provide safety
nets for banks and regulate them, taxpayers who pay for these safety nets, and
the financial markets that banks compete with and complement as well. That
is, we are all involved in the business of banking in one way or the other.
The manner in which banks interact with these other actors in the drama
shapes banking itself. For example, when competition for borrowers that
banks face from investment banks and the capital market heats up, banks
deepen their relationships with borrowers.25 Trust becomes more important,
and banks invest more in relationships that add greater value to borrowers.
Because banks have both a bright and a dark side for society, banks must
take into account their relationships with these other actors in striking a bal-
ance between the role of banking in promoting economic growth and its role
in providing economic stability. By articulating an authentic higher purpose
that serves society and developing a culture that strikes the right balance be-
tween growth and stability, banks can engender trust, which is central to so-
ciety being willing to continue to provide the safety nets that are so crucial for
banks. Banking without trust is like prayer without faith. As we shall see, both
organizational higher purpose and capital play important roles in the ability
of banks to support economic growth in society without sacrificing growth
and to earn society’s trust.
So far, we have seen only the on-balance-sheet activities of banks. This
is like observing the tip of the iceberg that is visible above the water—over
90 percent is below the water. A large portion of what banks do is actually off
the balance sheet, like the iceberg below the water. Even the loans banks make
do not necessarily stay on their balance sheets, because of things like securiti-
zation, a process by which a bank that originates a loan then proceeds to sell
it into a pool from which market-traded securities are issued, so a piece of
that loan will be held eventually by some investor. For example, do you know
which institution holds your home mortgage? It is most likely not the bank
you borrowed from. What exactly do banks do off the balance sheet? Let us
turn to this in the next chapter.
Notes
1. See Ermatinger 2007, 34 (emphasis added).
2. See Davies 2016.
3. Interestingly, this kind of money coexisted with metallic money (coins) during the
Egyptian empire of the Ptolemies (323–30 bce). See Davies 2016.
4. But these fake receipts are not fiat money, which is money created by the govern-
ment and has the authority of the government backing it. Economists refer to these
fake receipts as “private money” created by banks.
5. I am using the terminology used in Donaldson, Piacentino, and Thakor 2018. What
is described here is a simplified version of their general equilibrium model.
6. Macmillan Committee 1931, 34.
7. See Donaldson, Piacentino, and Thakor 2018
8. In information economics, incorporating this consideration means taking into ac-
count an “incentive compatibility constraint.”
9. See Coval and Thakor 2005, Millon and Thakor 1985, and Ramakrishnan and
Thakor 1984.
10. The costs of verifying things like borrower cash flows, to ensure that debt contracts
are being appropriately serviced, leads not only to an economic justification for
using debt contracts but also to a justification for banks to serve as intermediaries
to reduce verification costs.
11. See Bhattacharya and Chiesa (1995), who develop a theory in which some borrowers
prefer bank financing to market financing because the former better protects infor-
mation confidentiality.
12. Fortunately, we have plenty of theories that deal both with what banks do on the
asset side and what they do on the liability side. See Diamond 1984, Diamond and
Dybvig 1983, Ramakrishnan and Thakor 1984, Millon and Thakor 1985, and Coval
and Thakor 2005. See Bhattacharya and Thakor 1993 for a review.
13. See Berger and Bouwman 2009.
14. See Bryant 1980 and Diamond and Dybvig 1983.
15. See Greenbaum, Thakor, and Boot 2015.
16. These consequences were derived by Boot and Thakor 1994 in a theoretical model
of relationship lending with collateral.
17. Collateral is typically costly for borrowers to post. See Besanko and Thakor
1987a, 1987b.
18. Lo 2012 reviews twenty-one books on the subject. See Thakor 2015a for a recent
literature review.
19. Bernanke 2012.
20. I am using the terminology used in Merton and Thakor forthcoming in their theory
of financial intermediation based on the “functional perspective.”
21. See Merton 1993, 1997.
22. See Merton and Thakor forthcoming.
23. See Merton 1977.
24. Weaknesses in corporate culture often lead to reckless behavior in banking, so a
more safety-oriented culture is typically welcome news.
25. See Boot and Thakor 2000 for a foundational theory of relationship banking using
this idea.
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Speech at the Russell Sage Foundation and the Century Foundation Conference
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Besanko, David, and Anjan V. Thakor. 1987a. “Collateral and Rationing Sorting
Equilibria in Monopolistic and Competitive Credit Markets.” International
Economic Review 28 (3): 167–182.
Besanko, David, and Anjan V. Thakor. 1987b. “Competitive Equilibrium in the
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3
Out of Sight, Out of Mind?

Off-B alance-S heet Banking
Introduction: Tales from the Twilight Zone

The first tale is about the December 2015 Paris Climate Accord. Major en-
thusiasm followed because there was widespread agreement on global emis-
sion reductions and pledges to increase investments in renewable energy.
This was welcome news to supporters of clean energy in light of diminishing
enthusiasm on the part of traditional venture capitalists to invest in renew-
able-energy companies.1 However, not long after the Paris Accord, there was
bad news. SunEdison filed for bankruptcy in April 2016. The company was
planning to become a big player in renewable energy. But its bankruptcy cast
a pall over the prospects of private-sector initiatives to promote clean, renew-
able energy. What should be done to regain momentum?
For the second tale, imagine that you own a house in an area in which
there is plenty of sunshine most of the year, and you spend a fortune on air
conditioning, which you also need most of the year. Along comes a company
that wants to sell you solar panels for the house so you can convert the whole
house to solar energy. You like the idea because you care about the environ-
ment. The problem is the cost. The estimate is $100,000. You just can’t afford
that right now. What do you do?
For the third tale, imagine a somewhat different challenge. There is a com-
munity with a large inventory of unsold houses—some of these are houses
that were foreclosed on during the Great Recession, and others are houses the
homeowners want to sell but are unable to get a good price for. There are just
not enough homebuyers. In the community there is ironically also a shortage
of rental housing. What should be done?
The answers to all three questions are the same—securitization. In the first
case, the big challenge is to stimulate demand for the output of the clean en-
ergy company, especially in an era of low oil prices. This is reflected in the
second case—an individual who simply lacks the wealth or liquidity for a
major outlay on solar panels. It is estimated that the national average residen-
tial solar price was around $3.70 per watt during 2014–2015, which includes
installation and ongoing maintenance costs.2 The median US household
income was $53,657 in 2014, which puts solar panels out of reach for most
Americans. The third case reflects an imbalance in the availability of rental
property vis-à-vis homes for sale, relative to demand. How is securitization
the answer in all cases?
Let us begin by summarizing how securitization works. A large number
of similar assets—essentially claims to future cash flows—are pooled to-
gether. Then multiple tranches or classes of asset-backed securities (ABS)—
that is, securities whose holders will be paid with the cash flows from the
pooled assets—are created. These are multiple prioritized claims against
the stream of cash flows from the asset portfolio pool. These tranches have
differing seniorities, so all of the portfolio cash flows are first used to pay off
the seniormost tranche. Once this tranche is fully paid off, the next most
senior tranche begins to be paid off, and so on. So the seniormost tranche
has the lowest risk as well as the shortest duration. Each tranche is typically
given a rating by the credit rating agencies. So securitization creates different
debt claims against a relatively homogeneous pool of assets (which are them-
selves debt claims). The ABS are purchased by capital market investors, which
provides the funding for the assets being securitized.
So consider the first two cases. Suppose the solar panel company tells you
that you do not need to pay anything for the solar panels to be installed. They
will do it at no cost to you. However, all of the power generated will be given
by you to the grid. They will then sell it back to you, but it will cost you less
than what you are paying for power right now.
How can the solar panel company do this? By securitizing solar panel
sales. The idea is for the company to raise the financing for the purchase and
installation by selling claims to investors and then repay these investors from
the revenue from the sale of power back to the consumers. This is not just an
idea anymore. It is already being done. In this new residential solar business
model for households, consumers have become “prosumers” of electricity—
producing, consuming, and reselling electricity to the grid. A commonly used
contract is a solar “power purchase agreement” (PPA). With this contract,
there is typically a twenty-year lease agreement in which the solar company
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—Oh! j’y ai déjà songé, fit le prêtre. Si je désire me trouver en
commerce galant avec elle, n’est-ce pas pour lire au fond de son
cœur?
—Elle n’a pas de cœur, dit vivement le duc, elle est encore plus
ambitieuse que nous ne le sommes.
—Tu es un brave capitaine, dit le cardinal à son frère; mais crois-
moi, nos deux robes sont bien près l’une de l’autre, et je la faisais
surveiller par Marie avant que tu ne songeasses à la soupçonner.
Catherine a moins de religion que n’en a mon soulier. Si elle n’est
pas l’âme du complot, ce n’est pas faute de désir; mais nous allons
la juger sur le terrain et voir comment elle nous appuiera.
Jusqu’aujourd’hui j’ai la certitude qu’elle n’a pas eu la moindre
communication avec les hérétiques.
—Il est temps de tout découvrir au roi et à la reine-mère qui ne
sait rien, dit le duc, et voilà la seule preuve de son innocence; peut-
être attend-on le dernier moment pour l’éblouir par les probabilités
d’un succès. La Renaudie va savoir par mes dispositions que nous
sommes avertis. Cette nuit, Nemours a dû suivre les détachements
de Réformés qui arrivaient par les chemins de traverse, et les
conjurés seront forcés de venir nous attaquer à Amboise, où je les
laisserai tous entrer. Ici, dit-il en montrant les trois côtés du rocher
sur lequel le château de Blois est assis comme venait de le faire
Chiverni, nous aurions un assaut sans aucun résultat, les Huguenots
viendraient et s’en iraient à volonté. Blois est une salle à quatre
entrées, tandis qu’Amboise est un sac.
—Je ne quitterai pas la Florentine, dit le cardinal.
—Nous avons fait une faute, reprit le duc en s’amusant à lancer
en l’air son poignard et à le rattraper par la coquille, il fallait se
conduire avec elle comme avec les Réformés, lui donner la liberté
de ses mouvements pour la prendre sur le fait.
Le cardinal regarda pendant un moment son frère en hochant la
tête.
—Que nous veut Pardaillan? dit le Grand-Maître en voyant venir
sur la terrasse ce jeune gentilhomme devenu célèbre par sa
rencontre avec la Renaudie et par leur mort mutuelle.
—Monseigneur, un homme envoyé par le pelletier de la reine est
à la porte, et dit avoir à lui remettre une parure d’hermine, faut-il le
laisser entrer?
—Eh! oui, un surcot dont elle parlait hier, reprit le cardinal; laissez
passer ce courtaud de boutique, elle aura besoin de cela pour
voyager le long de la Loire.
—Par où donc est-il venu, pour n’être arrêté qu’à la porte du
château? demanda le Grand-Maître.
—Je l’ignore, répondit Pardaillan.
—Je le lui demanderai chez la reine, se dit le Balafré, qu’il
attende le lever dans la salle des gardes; mais, Pardaillan, est-il
jeune?
—Oui, monseigneur; il se donne pour le fils de Lecamus.
—Lecamus est un bon catholique, fit le cardinal, qui, de même
que le Grand-Maître, était doué de la mémoire de César. Le curé de
Saint-Pierre-aux-Bœufs compte sur lui, car il est quartenier du
Palais.
—Néanmoins fais causer le fils avec le capitaine de la garde
écossaise, dit le Grand-Maître qui appuya sur ce verbe en y donnant
un sens facile à comprendre. Mais Ambroise est au château, par lui
nous saurons si c’est bien le fils de Lecamus qui l’a fort obligé jadis.
Demande Ambroise Paré.
Ce fut en ce moment que la reine Catherine alla seule au-devant
des deux frères qui s’empressèrent de venir à elle en lui témoignant
un respect dans lequel l’Italienne voyait de constantes ironies.
—Messieurs, dit-elle, daignerez-vous me confier ce qui se
prépare? La veuve de votre ancien maître serait-elle dans votre
estime au-dessous des sieurs de Vieilleville, Birague et Chiverni?
—Madame, répondit le cardinal sur un ton galant, notre devoir
d’hommes, avant celui de politiques, est de ne pas effrayer les
dames par de faux bruits. Mais ce matin il y a lieu de conférer sur les
affaires de l’État. Vous excuserez mon frère d’avoir commencé par
donner des ordres purement militaires et auxquels vous deviez être
étrangère: les choses importantes sont à décider. Si vous le trouvez
bien, nous irons au lever du roi et de la reine, l’heure approche.
—Qu’y a-t-il, monsieur le Grand-Maître? dit Catherine en jouant
l’effroi.
—La Réformation, madame, n’est plus une hérésie, c’est un parti
qui va venir en armes vous arracher le roi.
Catherine, le cardinal, le duc et les seigneurs se dirigèrent alors
vers l’escalier par la galerie où se pressaient les courtisans qui
n’avaient pas le droit d’entrée dans les appartements et qui se
rangèrent en haie.
Gondi, qui, pendant que Catherine causait avec les deux princes
lorrains, les avait examinés, dit en bon toscan, à l’oreille de la reine-
mère, ces deux mots qui devinrent proverbes et qui expliquent une
des faces de ce grand caractère royal: Odiate e aspettate! (Haïssez
et attendez.)
Pardaillan, qui vint donner l’ordre à l’officier de garde à la
conciergerie du château de laisser passer le commis du pelletier de
la reine, trouva Christophe béant devant le porche et occupé à
regarder la façade due au bon roi Louis XII où se trouvaient alors en
plus grand nombre qu’aujourd’hui des sculptures drôlatiques, s’il faut
en juger par ce qui nous en reste. Ainsi, les curieux remarquent une
figurine de femme taillée dans le chapiteau d’une des colonnes de la
porte, la robe retroussée et faisant railleusement voir
Ce que Brunel à Marphise montra
à un gros moine accroupi dans le chapiteau de la colonne

correspondante à l’autre jambage du chambranle de cette porte, au-
dessus de laquelle était alors la statue de Louis XII. Plusieurs des
croisées de cette façade, travaillées dans ce goût et qui
malheureusement ont été détruites, amusaient ou paraissaient
amuser Christophe, sur qui les arquebusiers de garde faisaient déjà
pleuvoir des plaisanteries.
—Il se logerait bien là, celui-ci, disait l’anspessade en caressant
les charges d’arquebuse toutes préparées en forme de pain de
sucre et accrochées sur son baudrier.
—Eh! Parisien, dit un soldat, tu n’en as jamais tant vu!
—Il reconnaît le bon roi Louis XII, dit un autre.
Christophe feignait de ne pas entendre, et cherchait encore à
outrer son ébahissement, en sorte que son attitude niaise devant le
corps de garde lui fut un excellent passe-port aux yeux de
Pardaillan.
—La reine n’est pas levée, dit le jeune capitaine, viens l’attendre
dans la salle des gardes.
Christophe suivit Pardaillan assez lentement. Il fit exprès
d’admirer la jolie galerie découpée en arcades où, sous le règne de
Louis XII, les courtisans attendaient l’heure des réceptions à couvert
quand il faisait mauvais temps, et où se trouvaient alors quelques
seigneurs attachés aux Guise, car l’escalier, si bien conservé de nos
jours, qui menait à leurs appartements, est au bout de cette galerie
dans une tour que son architecture recommande à l’admiration des
curieux.
—Hé! bien, es-tu venu pour faire des études de tailleur
d’images? cria Pardaillan en voyant Lecamus arrêté devant les jolies
sculptures des tribunes extérieures qui réunissent ou, si vous voulez,
qui séparent les colonnes de chaque arcade.
Christophe suivit le jeune capitaine vers l’escalier d’honneur, non
sans avoir mesuré cette tour quasi-moresque par un regard
d’extase. Par cette belle matinée, la cour était pleine de capitaines
d’ordonnance, de seigneurs qui causaient par groupes, et dont les
brillants costumes animaient ce lieu que les merveilles de
l’architecture répandues sur sa façade encore neuve rendaient déjà
si brillant.
—Entre là, dit Pardaillan à Lecamus en lui faisant signe de le
suivre par la porte en bois sculpté du deuxième étage et qu’un garde
de la porte ouvrit en reconnaissant Pardaillan.
Chacun peut se figurer l’étonnement de Christophe en entrant
dans cette salle des gardes, alors si vaste, qu’aujourd’hui le Génie
militaire l’a divisée en deux par une cloison pour en faire deux
chambrées; elle occupe en effet au second étage chez le roi, comme
au premier chez la reine-mère, le tiers de la façade sur la cour, car
elle est éclairée par deux croisées à gauche et deux croisées à
droite de la tour où se développe le fameux escalier. Le jeune
capitaine alla vers la porte de la chambre de la reine et du roi qui
donnait dans cette vaste salle, et dit à l’un des deux pages de
service d’avertir madame Dayelle, une des femmes de chambre de
la reine, que le pelletier était dans la salle avec ses surcots.
Sur un geste de Pardaillan, Christophe alla se mettre près d’un
officier assis sur une escabelle, au coin d’une cheminée grande
comme la boutique de son père et qui se trouvait à l’un des bouts de
cette immense salle en face d’une cheminée absolument pareille à
l’autre bout. Tout en causant avec ce lieutenant, il finit par
l’intéresser en lui contant les pénuries du commerce. Christophe
parut si véritablement marchand, que l’officier fit partager cette
opinion au capitaine de la garde écossaise qui vint de la cour
questionner Christophe en l’examinant à la dérobée et avec soin.
Quelque prévenu que fût Christophe Lecamus, il ne pouvait
comprendre la férocité froide des intérêts entre lesquels Chaudieu
l’avait glissé. Pour un observateur qui eût connu le secret de cette
scène, comme l’historien le connaît aujourd’hui, il y aurait eu de quoi
trembler à voir ce jeune homme, l’espoir de deux familles, hasardé
entre ces deux puissantes et impitoyables machines, Catherine et
les Guise. Mais y a-t-il beaucoup de courages qui mesurent
l’étendue de leurs dangers? Par la manière dont étaient gardés le
port de Blois, la ville et le château, Christophe s’attendait à trouver
des piéges et des espions partout, il avait donc résolu de cacher la
gravité de sa mission et la tension de son esprit sous l’apparence
niaise et commerciale avec laquelle il venait de se montrer aux yeux
du jeune Pardaillan, de l’officier de garde et du capitaine.
L’agitation qui dans un château royal accompagne l’heure du
lever commençait à se manifester. Les seigneurs, dont les chevaux
et les pages ou les écuyers restaient dans la cour extérieure du
château, car personne, excepté le roi et la reine, n’avait le droit
d’entrer à cheval dans la cour intérieure, montaient par groupes le
magnifique escalier, et envahissaient cette grande salle des gardes
à deux cheminées, dont les fortes poutres sont aujourd’hui sans
leurs ornements, où de méchants petits carreaux rouges remplacent
les ingénieuses mosaïques des planchers, mais où les tapisseries
de la Couronne cachaient alors les gros murs blanchis à la chaux
aujourd’hui et où brillaient à l’envi les arts de cette époque unique
dans les fastes de l’Humanité. Réformés et Catholiques venaient
savoir les nouvelles, examiner les visages, autant que faire leur cour
au roi. L’amour excessif de François II pour Marie Stuart, auquel ni
les Guise ni la reine-mère ne s’opposaient, et la complaisance
politique avec laquelle s’y prêtait Marie Stuart, ôtaient au roi tout
pouvoir; aussi, quoiqu’il eût dix-sept ans, ne connaissait-il de la
royauté que les plaisirs, et du mariage que les voluptés d’une
première passion. Chacun faisait en réalité la cour à la reine Marie, à
son oncle le cardinal de Lorraine et au Grand-Maître.
Ce mouvement eut lieu devant Christophe, qui étudiait l’arrivée
de chaque personnage avec une avidité bien naturelle. Une
magnifique portière de chaque côté de laquelle se tenaient deux
pages et deux gardes de la compagnie écossaise, alors de service,
lui indiquait l’entrée de cette chambre royale, si fatale au fils du
Grand-Maître actuel, le second Balafré, qui vint expirer au pied du lit
alors occupé par Marie Stuart et par François II. Les filles d’honneur
de la reine occupaient la cheminée opposée à celle où Christophe
causait toujours avec le capitaine des gardes. Par sa situation, cette
seconde cheminée était la cheminée d’honneur, car elle est
pratiquée dans le gros mur de la salle du Conseil, entre la porte de
la chambre royale et celle du Conseil, en sorte que les filles et les
seigneurs qui avaient le droit d’être là, se trouvaient sur le passage
du roi et des reines. Les courtisans étaient certains de voir
Catherine, car ses filles d’honneur, en deuil comme toute la cour,
montèrent de chez elle, conduites par la comtesse de Fiesque, et
prirent leur place du côté de la salle du Conseil, en face des filles de
la jeune reine amenées par la duchesse de Guise, et qui occupaient
le coin opposé, du côté de la chambre royale. Les courtisans
laissaient entre ces demoiselles, qui appartenaient aux premières
familles du royaume, un espace de quelques pas que les plus
grands seigneurs avaient seuls la permission de franchir. La
comtesse de Fiesque et la duchesse de Guise étaient, selon le droit
de leurs charges, assises au milieu de ces nobles filles qui toutes
restaient debout. L’un des premiers qui vint se mêler à ces deux
escadrons si dangereux fut le duc d’Orléans, frère du roi, qui
descendit de son appartement situé au-dessus, et qu’accompagnait
monsieur de Cypierre, son gouverneur. Ce jeune prince, qui, avant la
fin de cette année, devait régner sous le nom de Charles IX, alors
âgé de dix ans, était d’une excessive timidité. Le duc d’Anjou et le
duc d’Alençon, ses deux frères, ainsi que la princesse Marguerite qui
fut la femme de Henri IV, encore trop jeunes pour venir à la cour,
restaient sous la conduite de leur mère dans ses appartements. Le
duc d’Orléans, richement vêtu, selon la mode du temps, d’un haut-
de-chausses en soie, d’un justaucorps de drap d’or orné de fleurs
noires, et d’un petit manteau de velours brodé, le tout noir (il portait
encore le deuil du roi son père), salua les deux dames d’honneur et
resta près des filles de sa mère. Déjà plein d’antipathie pour les
adhérents de la maison de Guise, il répondit froidement aux paroles
de la duchesse et appuya son bras sur le dossier de la haute chaise
de la comtesse de Fiesque. Son gouverneur, un des plus beaux
caractères de ce temps, monsieur de Cypierre, resta derrière lui
comme une panoplie. Amyot, en simple soutane d’abbé,
accompagnait aussi le prince, il était déjà son précepteur comme il
fut aussi celui des trois autres princes dont l’affection lui devint si
profitable. Entre la cheminée d’honneur et celle où se groupaient à
l’autre extrémité de cette salle les gardes, leur capitaine, quelques
courtisans et Christophe muni de son carton, le chancelier Olivier,
protecteur et prédécesseur de Lhospital, costumé comme l’ont
toujours été depuis les chanceliers de France, se promenait avec le
cardinal de Tournon récemment arrivé de Rome, en échangeant
quelques phrases d’oreille en oreille au milieu de l’attention générale
que leur prêtaient les seigneurs massés le long du mur qui sépare
cette salle de la chambre du roi comme une tapisserie vivante,
devant la riche tapisserie aux mille personnages. Malgré la gravité
des circonstances, la cour offrait l’aspect que toutes les cours
offriront dans tous les pays, à toutes les époques et dans les plus
grands dangers: des courtisans parlant toujours de choses
indifférentes en pensant à des choses graves, plaisantant en
étudiant les visages, et s’occupant d’amours et de mariages avec
des héritières au milieu des catastrophes les plus sanglantes.
—Que dites-vous de la fête d’hier? demanda Bourdeilles,
seigneur de Brantôme, en s’approchant de mademoiselle de
Piennes, une des filles de la reine-mère.
—Messieurs du Baïf et du Bellay n’ont eu que de belles idées,
dit-elle en montrant les deux ordonnateurs de la fête qui se
trouvaient à quelques pas...—J’ai trouvé cela d’un goût exécrable,
ajouta-t-elle à voix basse.
—Vous n’y aviez pas de rôle? dit mademoiselle de Lewiston de
l’autre bord.
—Que lisez-vous là, madame? dit Amyot à madame de Fiesque.
—L’Amadis de Gaule, par le seigneur des Essarts, commissaire
ordinaire de l’hartillerie du Roi.
—Un ouvrage charmant, dit la belle fille qui fut depuis si célèbre
sous le nom de Fosseuse quand elle devint dame d’honneur de la
reine Marguerite de Navarre.
—Le style est de forme nouvelle, dit Amyot. Adoptez-vous ces
barbaries? ajouta-t-il en regardant Brantôme.
—Il plaît aux dames, que voulez-vous? s’écria Brantôme en
allant saluer madame de Guise qui tenait les Célèbres dames de
Boccace.—Il doit s’y trouver des femmes de votre maison, madame,
dit-il; mais le sieur Boccace a eu tort de ne pas être de notre temps,
il aurait trouvé d’amples matières pour augmenter ses volumes...
—Comme ce monsieur de Brantôme est adroit, dit la belle
mademoiselle de Limeuil à la comtesse de Fiesque; il est venu
d’abord à nous, mais il restera dans le quartier des Guise.
—Chut, dit madame de Fiesque en regardant la belle Limeuil.
Mêlez-vous de ce qui vous intéresse...
La jeune fille tourna les yeux vers la porte. Elle attendait Sardini,
un noble Italien avec lequel la reine-mère, sa parente, la maria plus
tard après l’accident qui lui arriva dans le cabinet de toilette même
de Catherine, et qui lui valut l’honneur d’avoir une reine pour sage-
femme.
—Par saint Alipantin, mademoiselle Davila me semble plus jolie
chaque matin, dit monsieur de Robertet, secrétaire d’État, en saluant
le groupe de la reine-mère.
L’arrivée du secrétaire d’État, qui cependant était exactement ce
qu’est un ministre aujourd’hui, ne fit aucune sensation.
—Si cela est, monsieur, prêtez-moi donc le libelle fait contre
messieurs de Guise, je sais qu’on vous l’a prêté, dit à Robertet
mademoiselle Davila.
—Je ne l’ai plus, répondit le secrétaire en allant saluer madame
de Guise.
—Je l’ai, dit le comte de Grammont à mademoiselle Davila, mais
je ne vous le donne qu’à une condition...
—Sous condition!... fi! dit madame de Fiesque.
—Vous ne savez pas ce que je veux, répondit Grammont.
—Oh! cela se devine, dit la Limeuil.
La coutume italienne de nommer les dames, comme font les
paysans de leurs femmes, la une telle, était alors de mode à la cour
de France.
—Vous vous trompez, reprit vivement le comte, il s’agit de
remettre à mademoiselle de Matha, l’une des filles de l’autre bord,
une lettre de mon cousin de Jarnac.
—Ne compromettez pas mes filles, dit la comtesse de Fiesque, je
la donnerai moi-même!
—Savez-vous des nouvelles de ce qui se passe en Flandre?
demanda madame de Fiesque au cardinal de Tournon. Il paraît que
monsieur d’Egmont donne dans les nouveautés.
—Lui et le prince d’Orange, reprit Cypierre en faisant un geste
d’épaules assez significatif.
—Le duc d’Albe et le cardinal Granvelle y vont, n’est-ce pas,
monsieur? dit Amyot au cardinal de Tournon qui restait sombre et
inquiet entre les deux groupes, après sa conversation avec le
chancelier.
—Heureusement nous sommes tranquilles, et nous n’avons à
vaincre l’Hérésie que sur le théâtre, dit le jeune duc d’Orléans en
faisant allusion au rôle qu’il avait rempli la veille, celui d’un chevalier
domptant une hydre qui avait sur le front le mot Réformation.
Catherine de Médicis, d’accord en ceci avec sa belle-fille, avait
laissé faire une salle de spectacle de l’immense salle qui plus tard
fut disposée pour les États de Blois, et où, comme il a été déjà dit,
aboutissaient le château de François Ier et celui de Louis XII.
Le cardinal ne répondit rien et reprit sa marche au milieu de la
salle en causant à voix basse entre monsieur de Robertet et le
chancelier. Beaucoup de personnes ignorent les difficultés que les
Secrétaireries d’État, devenues depuis les Ministères, ont
rencontrées dans leur établissement et combien de peines ont eues
les rois de France à les créer. A cette époque un secrétaire d’État
comme Robertet était purement et simplement un écrivain, il
comptait à peine au milieu des princes et des grands, qui décidaient
des affaires de l’État. Il n’y avait pas alors d’autres fonctions
ministérielles que celles de Surintendant des finances, de Chancelier
et de Garde-des-sceaux. Les rois accordaient une place dans leur
Conseil par des lettres patentes à ceux de leurs sujets dont les avis
leur paraissaient utiles à la conduite des affaires publiques. On
donnait l’entrée au Conseil à un président de chambre du Parlement,
à un évêque, à un favori sans titre. Une fois admis au Conseil, le
sujet y fortifiait sa position en se faisant revêtir des charges de la
Couronne auxquelles étaient dévolues des attributions, telles que
des Gouvernements, l’épée de connétable, la Grande-Maîtrise de
l’artillerie, le bâton de Maréchal, la Colonelle-générale de quelque
corps militaire, la Grande-Amirauté, la Capitainerie des Galères, ou
souvent une charge de cour comme celle de Grand-Maître de la
maison qu’avait alors le duc de Guise.
—Croyez-vous que le duc de Nemours épouse Françoise?
demanda madame de Guise au précepteur du duc d’Orléans.
—Ah! madame, répondit-il, je ne sais que le latin.
Cette réponse fit sourire ceux qui furent à portée d’entendre. En
ce moment, la séduction de Françoise de Rohan par le duc de
Nemours était le sujet de toutes les conversations; mais, comme le
duc de Nemours était cousin de François II, et doublement allié de la
maison de Valois par sa mère, les Guise le regardaient plutôt
comme séduit que comme séducteur. Néanmoins le crédit de la
maison de Rohan fut tel, qu’après le règne de François II, le duc de
Nemours fut obligé de quitter la France, à cause du procès que lui
firent les Rohan, et que le crédit des Guise arrangea. Son mariage
avec la duchesse de Guise, après l’assassinat de Poltrot, peut
expliquer la question que la duchesse avait adressée à Amyot, en
révélant la rivalité qui devait exister entre mademoiselle de Rohan et
la duchesse.
—Mais voyez un peu le groupe des mécontents, là-bas, dit le
comte de Grammont en montrant messieurs de Coligny, le cardinal
de Châtillon, Banville, Thoré, Moret et plusieurs seigneurs
soupçonnés de tremper dans la Réformation qui se tenaient tous
entre deux croisées, du côté de l’autre cheminée.
—Les Huguenots se remuent, dit Cypierre. Nous savons que
Théodore de Bèze est à Nérac pour obtenir de la reine de Navarre
qu’elle se déclare pour les Réformés en abjurant publiquement,
ajouta-t-il en regardant le bailli d’Orléans qui était aussi chancelier
de la reine de Navarre et qui observait la cour.
—Elle le fera! répondit sèchement le bailli d’Orléans.
Ce personnage, le Jacques Cœur orléanais, un des plus riches
bourgeois de ce temps, se nommait Groslot et faisait les affaires de
Jeanne d’Albret à la cour de France.
—Vous le croyez? dit le chancelier de France au chancelier de
Navarre en appréciant la portée de l’affirmation de Groslot.
—Ne savez-vous pas, dit le riche orléanais, que cette reine n’a
de la femme que le sexe? Elle est entière aux choses viriles, elle a
l’esprit puissant aux grandes affaires, et le cœur invincible aux
grandes adversités.
—Monsieur le Cardinal, dit le chancelier Olivier à monsieur de
Tournon qui avait écouté Groslot, que pensez-vous de cette audace?
—La reine de Navarre a bien fait de choisir pour son chancelier
un homme à qui la maison de Lorraine a des emprunts à faire et qui
offre son logis au roi quand on parle d’aller à Orléans, répondit le
cardinal.
Le chancelier et le cardinal se regardèrent alors sans oser se
communiquer leurs pensées; mais Robertet les leur exprima, car il
croyait nécessaire de montrer plus de dévouement aux Guise que
ces grands personnages en se trouvant plus petit qu’eux.
—C’est un grand malheur que la maison de Navarre, au lieu
d’abjurer la religion de ses pères, n’abjure pas l’esprit de vengeance
et de révolte que lui a soufflé le connétable de Bourbon. Nous allons
revoir les querelles des Armagnacs et des Bourguignons.
—Non, dit Groslot, car il y a du Louis XI dans le cardinal de
Lorraine.
—Et aussi chez la reine Catherine, répondit Robertet.
En ce moment madame Dayelle, la femme de chambre favorite
de la reine Marie Stuart, traversa la salle et alla vers la chambre de
la reine. Le passage de la femme de chambre causa du mouvement.
—Nous allons bientôt entrer, dit madame de Fiesque.
—Je ne le crois pas, répondit madame de Guise, Leurs Majestés
sortiront, car on va tenir un grand conseil.
La Dayelle se glissa dans la chambre royale après avoir gratté à
la porte, façon respectueuse inventée par Catherine de Médicis, et
qui fut adoptée à la cour de France.
—Quel temps fait-il, ma chère Dayelle? dit la reine Marie en
montrant son blanc et frais visage hors du lit en en secouant les
rideaux.
—Ah! madame...
—Qu’as-tu, ma Dayelle? on dirait que les archers sont à tes
trousses.
—Oh! madame, le roi dort-il encore?
—Oui.
—Nous allons quitter le château, et monsieur le cardinal m’a
priée de vous le dire, afin que vous y disposiez le roi.
—Sais-tu pourquoi, ma bonne Dayelle?
—Les Réformés veulent vous enlever...
—Ah! cette nouvelle religion ne me laissera pas de repos! J’ai
rêvé cette nuit que j’étais en prison, moi qui réunirai les couronnes
des trois plus beaux royaumes du monde.
—Aussi, madame, est-ce un rêve!
—Enlevée?... ce serait assez gentil; mais pour fait de religion et
par des hérétiques, c’est une horreur.
La reine sauta hors du lit et vint s’asseoir dans une grande
chaise couverte de velours rouge, devant la cheminée, après que
Dayelle lui eut donné une robe de chambre en velours noir, qu’elle
serra légèrement à la taille par une corde en soie. Dayelle alluma le
feu, car les matinées du mois de mai sont assez fraîches aux bords
de la Loire.
—Mes oncles ont donc appris ces nouvelles pendant la nuit?
demanda la reine à Dayelle, avec laquelle elle agissait
familièrement.
—Depuis ce matin, messieurs de Guise se promènent sur la
terrasse pour n’être entendus de personne et y ont reçu des
envoyés venus en toute hâte de différents points du royaume où les
Réformés s’agitent. Madame la reine-mère y était avec ses Italiens
en espérant qu’elle serait consultée; mais elle n’a pas été de ce petit
conseil.
—Elle doit être furieuse!
—D’autant plus qu’il y avait un restant de colère d’hier, répondit
Dayelle. On dit qu’en voyant paraître Votre Majesté dans sa robe
d’or retors et avec son joli voile de crêpe tanné, elle n’a pas été
gaie...
—Laisse-nous, ma bonne Dayelle, le roi s’éveille. Que personne,
pas même les petites entrées, ne nous dérange, il s’agit d’affaires
d’État, et mes oncles ne nous troubleront pas.
—Eh! bien, ma chère Marie, as-tu donc déjà quitté le lit? Est-il
grand jour? dit le jeune roi en s’éveillant.
—Mon cher mignon, pendant que nous dormons, les méchants
veillent et vont nous forcer de quitter cette belle demeure.
—Que parles-tu de méchants, ma mie! N’avons-nous pas eu la
plus jolie fête du monde hier au soir, n’étaient les mots latins que ces
messieurs ont jetés dans notre français?
—Ah! dit Marie, ce langage est de fort bon goût, et Rabelais l’a
déjà mis en lumière.
—Tu es une savante, et je suis bien fâché de ne pouvoir le
célébrer en vers; si je n’étais pas roi, je reprendrais à mon frère
maître Amyot qui le rend si savant...
—N’enviez rien à votre frère qui fait des poésies et me les montre
en me demandant de lui montrer les miennes. Allez, vous êtes le
meilleur des quatre et serez aussi bon roi que vous êtes amant
gentil. Aussi, peut-être est-ce pour cela que votre mère vous aime si
peu! Mais sois tranquille. Moi, mon cher cœur, je t’aimerai pour tout
le monde.
—Je n’ai pas grand mérite à aimer une si parfaite reine, dit le
petit roi. Je ne sais qui m’a retenu hier de t’embrasser devant toute
la cour quand tu as dansé le branle au flambeau! J’ai clairement vu
que toutes les femmes ont l’air d’être des servantes auprès de toi,
belle Marie...
—Pour ne parler qu’en prose, vous parlez à ravir, mon mignon;
mais aussi est-ce l’amour qui parle. Et vous, vous savez bien, mon
aimé, que vous ne seriez qu’un pauvre petit page, encore vous
aimerais-je autant que je vous aime, et il n’y a rien cependant de
plus doux que de pouvoir se dire: Mon amant est roi.
—Oh! le joli bras! Pourquoi faut-il nous habiller? J’aime tant à
passer mes doigts dans tes cheveux si doux, à mêler leurs anneaux
blonds. Ah! çà, ma mie, ne donne plus à baiser à tes femmes ce cou
si blanc et ce joli dos, ne le souffrez plus! C’est déjà trop que les
brouillards de l’Écosse y aient passé.
—Ne viendrez-vous pas voir mon cher pays? Les Écossais vous
aimeront, et il n’y aura pas de révolte comme ici.
—Qui se révolte dans notre royaume? dit François de Valois en
croisant sa robe et prenant Marie Stuart sur son genou.
—Oh! ceci est assurément fort joli, dit-elle en dérobant sa joue au
roi; mais vous avez à régner, s’il vous plaît, mon doux sire.
—Que parles-tu de régner? je veux ce matin...
—A-t-on besoin de dire je veux quand on peut tout? Ceci n’est
parler ni en roi, ni en amant. Mais, il ne s’agit point de cela, laisse!
Nous avons une affaire importante.
—Oh! dit le roi, il y a longtemps que nous n’avons eu d’affaire.
Est-elle amusante?
—Non, dit Marie, il s’agit de déménager.
—Je gage, ma mie, que vous avez vu l’un de vos oncles, qui
s’arrangent si bien, qu’à dix-sept ans, je me comporte en roi
fainéant. Je ne sais pas, en vérité, pourquoi depuis le premier
conseil j’ai continué d’assister aux autres? Ils y pourraient faire tout
aussi bien les choses en mettant une couronne sur mon fauteuil, je
ne vois rien que par leurs yeux et décide à l’aveugle.
—Oh! monsieur, s’écria la reine en se levant de dessus le roi et
prenant un petit air de fâcherie, il était dit que vous ne me feriez plus
la moindre peine à ce sujet, et que mes oncles useraient du pouvoir
royal pour le bonheur de votre peuple. Il est gentil ton peuple? si tu
voulais le régenter toi seul, il te goberait comme une fraise. Il lui faut
des gens de guerre, un maître rude et à mains gantées de fer; tandis
que toi tu es un mignon que j’aime ainsi, que je n’aimerais pas
autrement, entendez-vous, monsieur? dit-elle en baisant au front cet
enfant qui paraissait vouloir se révolter contre ce discours et que
cette caresse adoucit.
—Oh! s’ils n’étaient pas vos oncles! s’écria François II. Ce
cardinal me déplaît énormément, et quand il prend son air patelin et
ses façons soumises pour me dire en s’inclinant: «Sire, il s’agit ici de
l’honneur de la couronne et de la foi de vos pères. Votre Majesté ne
saurait souffrir;» et ceci et cela... je suis sûr qu’il ne travaille que
pour sa maudite maison de Lorraine.
—Comme tu l’as bien imité! dit la reine. Mais pourquoi
n’employez-vous pas ces Lorrains à vous instruire de ce qui se
passe, afin de régner par vous-même dans quelque temps, à votre
grande majorité? Je suis votre femme, et votre honneur est le mien.
Nous régnerons, va, mon mignon! Mais tout ne sera pas roses pour
nous jusqu’au moment où nous ferons nos volontés! il n’y a rien de
si difficile pour un roi que de régner! Suis-je reine, moi, par exemple?
Croyez-vous que votre mère ne me rende pas en mal ce que mes
oncles font de bien pour la splendeur de votre trône? Hé! quelle
différence! Mes oncles sont de grands princes, neveux de
Charlemagne, pleins d’égards et qui sauraient mourir pour vous;
tandis que cette fille de médecin ou de marchand, reine de France
par hasard, est grièche comme une bourgeoise qui ne règne pas
dans son ménage. En femme mécontente de ne pas tout brouiller ici,
cette Italienne me montre à tout propos sa figure pâle et sérieuse;
puis, de sa bouche pincée: «Ma fille, vous êtes la reine, et je ne suis
plus que la seconde femme du royaume, me dit-elle (Elle enrage,
entends-tu, mon mignon?). Mais si j’étais en votre place, je ne
porterais pas de velours incarnat pendant que la cour est en deuil, je
ne paraîtrais pas en public avec mes cheveux unis et sans
pierreries, parce que ce qui n’est point séant à une simple dame l’est
encore moins chez une reine. Aussi ne danserais-je point de ma
personne, je me contenterais de voir danser!» Voilà ce qu’elle me
dit.
—Oh! mon Dieu, répondit le roi, je crois l’entendre. Dieu! si elle
savait...
—Oh! vous tremblez encore devant elle. Elle t’ennuie, dis-le?
nous la renverrons. Par ma foi! te tromper, passe encore, la bonne
femme est de Florence; mais t’ennuyer...
—Au nom du Ciel, Marie, tais-toi, dit François inquiet et content
tout à la fois, je ne voudrais pas que tu perdisses son amitié.
—N’ayez pas peur qu’elle se brouille jamais avec moi qui porterai
les trois plus belles couronnes du monde, mon cher petit roi, dit
Marie Stuart. Encore qu’elle me haïsse pour mille raisons, elle me
caresse afin de me détacher de mes oncles.
—Te haïr!...
—Oui, mon ange, et si je n’en avais mille de ces preuves que les
femmes se donnent entre elles de ce sentiment et dont la malice
n’est comprise que par elles, je me contenterais de sa constante
opposition à nos chères amours. Est-ce ma faute à moi, si ton père
n’a jamais pu souffrir mademoiselle Médicis? Enfin elle m’aime si
peu qu’il a fallu que vous vous missiez en colère pour que nous
n’eussions pas chacun notre appartement, ici et à Saint-Germain.
Elle prétendait que c’était l’usage des rois et reines de France.
L’usage! c’était celui de votre père, et cela s’explique. Quant à votre
aïeul François, le compère avait établi cet usage pour la commodité
de ses amours. Aussi, veillez-y bien! Si nous nous en allons d’ici,
que le Grand-Maître ne nous sépare point.
—Si nous nous en allons d’ici, Marie? Mais, moi, je ne veux point
quitter ce joli château d’où nous voyons la Loire et le Blésois, une
ville à nos pieds et le plus joli ciel du monde au-dessus de nos têtes
et ces délicieux jardins. Si je m’en vais, ce sera pour aller en Italie
avec toi, voir les peintures de Raphaël et Saint-Pierre.
—Et les orangers? Oh! mon mignon roi, si tu savais quelle envie
ta Marie nourrit de se promener sous des orangers en fleur et en
fruit! Hélas! peut-être n’en verrai-je jamais. Oh! entendre un chant
italien sous ces arbres parfumés, au bord d’une mer bleue, sous un
ciel bleu, et nous tenir ainsi!
—Partons, dit le roi.
—Partir! s’écria le Grand-Maître en entrant. Oui, sire, il s’agit de
quitter Blois. Pardonnez-moi ma hardiesse; mais les circonstances
sont plus fortes que l’étiquette, et je viens vous supplier de tenir
conseil.
Marie et François s’étaient vivement séparés en se voyant
surpris, et leurs visages offraient une même expression de majesté
royale offensée.
—Vous êtes un trop grand maître, monsieur de Guise, dit le
jeune roi tout en contenant sa colère.
—Au diable les amoureux! dit le cardinal en murmurant à l’oreille
de Catherine.
—Mon fils, répondit la reine-mère qui se montra derrière le
cardinal, il s’agit de la sûreté de votre personne et de votre royaume.
—L’hérésie veillait pendant que vous dormiez, sire, dit le cardinal.
—Retirez-vous dans la salle, fit le petit roi, nous tiendrons alors
conseil.
—Madame, dit le Grand-Maître à la reine, le fils de votre pelletier
vous apporte vos fourrures, qui sont de saison pour le voyage, car il
est probable que nous côtoierons la Loire. Mais, dit-il en se tournant
vers la reine-mère, il veut aussi vous parler, madame. Pendant que
le roi s’habillera, vous et madame la reine expédiez-le sur-le-champ,
afin que nous n’ayons point la tête rompue de cette bagatelle.
—Volontiers, dit Catherine, en se disant à elle-même: S’il compte
se défaire de moi par de semblables ruses, il ne me connaît point.
Le cardinal et le duc se retirèrent en laissant les deux reines et le
roi. En passant dans la salle des gardes, qu’il traversa de nouveau
pour aller dans la salle du conseil, le Grand-Maître dit à l’huissier de
lui amener le pelletier de la reine. Quand Christophe vit venir à lui,
d’un bout de la salle des gardes à l’autre, cet huissier, qu’il prit à son
costume pour un personnage, le cœur lui faillit; mais cette sensation,
si naturelle à l’approche du moment critique, devint terrible lorsque
l’huissier, dont le mouvement eut pour résultat d’attirer les yeux de
toute cette brillante assemblée sur Christophe, sur sa piètre mine et
ses paquets, lui dit:—Messeigneurs le cardinal de Lorraine et le
Grand-Maître vous mandent pour parler à vous dans la salle du
conseil.
—Aurais-je été trahi? se demanda le frêle ambassadeur des
Réformés.
Christophe suivit l’huissier en baissant les yeux, et ne les leva
qu’en se trouvant dans l’immense salle du conseil, dont l’étendue est
presque égale à celle de la salle des gardes. Les deux princes
lorrains y étaient seuls debout devant la magnifique cheminée
adossée à celle où, dans la salle des gardes, se tenaient les filles
des deux reines.
—Tu viens de Paris, quelle route as-tu donc prise? dit le cardinal
à Christophe.
—Je suis venu par eau, monseigneur, répondit le Réformé.
—Comment es-tu donc entré dans Blois? dit le Grand-Maître.
—Par le port, monseigneur.
—Personne ne t’a inquiété? fit le duc qui ne cessait d’examiner le
jeune homme.
—Non, monseigneur. Au premier soldat qui a fait mine de
m’arrêter, j’ai dit que je venais pour le service des deux reines, de
qui mon père est le pelletier.
—Que faisait-on à Paris? demanda le cardinal.
—On recherchait toujours l’auteur du meurtre commis sur le
président Minard.
—N’es-tu pas le fils du plus grand ami de mon chirurgien? dit le
duc de Guise trompé par la candeur que Christophe exprimait, une
fois son trouble apaisé.
—Oui, monseigneur.
Le Grand-Maître sortit, souleva brusquement la portière qui
cachait la double porte de la salle du conseil, et montra sa figure à
toute cette audience au milieu de laquelle il chercha le premier
chirurgien du roi. Ambroise, debout dans un coin, fut frappé par une
œillade que le duc lui lança, et vint à lui. Ambroise, qui inclinait déjà
vers la religion réformée, finit par l’adopter; mais l’amitié des Guise
et celle des rois de France le garantit de tous les malheurs qui
atteignirent les Réformés. Le duc, qui se regardait comme obligé de
la vie envers Ambroise Paré, l’avait fait nommer premier chirurgien
du roi depuis quelques jours.
—Que voulez-vous, monseigneur? dit Ambroise. Le roi serait-il
malade? je le croirais assez.
—Comment?
—La reine est trop jolie, répliqua le chirurgien.
—Ah! fit le duc étonné. Néanmoins il ne s’agit pas de ceci, reprit-
il après une pause. Ambroise, je veux te faire voir un de tes amis,
dit-il en l’emmenant sur le pas de la porte de la chambre du conseil
et lui montrant Christophe.
—Hé! c’est vrai, monseigneur, s’écria le chirurgien en tendant la
main à Christophe. Comment va ton père, mon gars?
—Mais bien, maître Ambroise, répondit Christophe.
—Et que viens-tu faire à la cour, dit le chirurgien, ce n’est pas ton
métier de porter les paquets, ton père te destine à la chicane. Veux-
tu la protection de ces deux grands princes pour être avocat?
—Oh! mon Dieu oui, dit Christophe, mais pour les intérêts de
mon père; et si vous pouvez intercéder pour nous, joignez-vous à
moi, fit-il en prenant un air piteux, pour obtenir de monseigneur le
Grand-Maître une ordonnance de paiement des sommes qui sont
dues à mon père, car il ne sait de quel bois faire flèche...
Le cardinal et le Grand-Maître se regardèrent et parurent
satisfaits.
—Maintenant laissez-nous, dit le Grand-Maître à Ambroise en lui
faisant un signe. Et vous, mon ami, dit-il à Christophe, faites
promptement vos affaires et retournez à Paris. Mon secrétaire vous
donnera une passe, car, mordieu, il ne fera pas bon sur les chemins!

The Purpose of Banking Transforming Banking For Stability and Economic Growth 1St Edition Anjan V Thakor Full Chapter

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Banking for Stability and Economic

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Introduction: The Columbo Approach: A Bird’s-​Eye View of the Book 1

ACT I. The Purpose of Banks: What Banks Do and Why

1. Money, Guns, and Lawyers: The Business of Banking 7

2. The Origins of Banking and the Services Banks Provide: Customers,

3. Out of Sight, Out of Mind? Off-​Balance-​Sheet Banking 33

ACT II. Bank Decision-​Making and the Regulation of Banks:

4. When Your Chickens Come Home to Roost: Bank Capital

5. Higher Purpose, Culture, and Capital: Is Banking on Culture

6. Financial System Architecture: Where Do Banks Sit in the

7. Changes in Banking over Time 105

ACT IV. Financial Crises: Causes, Effects, and Cures

8. Financial Crises and Banks: What Caused the Great Recession,

ACT V. Reforming Banking and Looking Ahead: Improving Banking

9. The Final Frontier: An Improved Banking System to Achieve

10. Closing Curtain: Should Banking Be Fundamentally Redesigned? 179

11. Summing Up and Looking Ahead: Fintech and Banking 203

Name Index 213

The Columbo Approach

The Four Biggest Takeaways

1. Banks create funding liquidity and private money by gathering deposits

2. Banks provide safekeeping services for valuables, maintain the confidenti-

1. Banks are crucial for economic growth.

deep-​seated attributes of the corporate culture in some banks, a culture

Takeaway #4: Although extensive regulations seek to limit such risk-​taking

• increase equity capital significantly in banks without burdening them

Recent Proposals to Fundamentally Reform Banking

I explain that this proposal is a logical consequence of the research that

The Purpose of Banks

Money, Guns, and Lawyers

It is necessarily part of the business of a banker to maintain appearances

Perceptions shape the confidence people have in banks. And confidence

The Bright and Dark Sides of Banking

Banking Is Old, But We Can’t Do Without It

There is now extensive academic research that explains why financial

From the Old to the New: What Do the

By now I’ve worked with Atlantic Capital on many things—​real estate

Preventing Banking Crises

Eighteen months after the collapse of the Butcher brothers’ Tennessee

Higher purpose is not charity or corporate social responsibility. These

The Origins of Banking and

From Warehouses to Banks

But this function of warehouses predates by centuries the Roman

Second, most people think of a bank as an entity that takes in deposits

It is not unnatural to think of deposits of a bank as being created

How Many Fake Receipts?

Whither Fiat Money?

Table 2.1 Hierarchy of Money Claims in the Economy

Money or money-​like Assets backing the claim

Central bank Currency in circulation Treasury bills (federal

Source: Thakor 2015b.

How Does Money Creation Interact with Lending?

Provide Process information

• Gather deposits • Provide safekeeping • Process various types of

Figure 2.3 What Banks Do.

Banking Is Not a One-​Night Stand:

Library of Congress Cataloging-in-Publication Data

Introduction: The Columbo Approach: A Bird’s-Eye View of the Book 1

3. Out of Sight, Out of Mind? Off-Balance-Sheet Banking 33

ACT II. Bank Decision-Making and the Regulation of Banks:

deep-seated attributes of the corporate culture in some banks, a culture

Takeaway #4: Although extensive regulations seek to limit such risk-taking

By now I’ve worked with Atlantic Capital on many things—real estate

Money or money-like Assets backing the claim

Banking Is Not a One-Night Stand:

Figure 2.4 The Existence-Failure-Regulation Cycle in Banking.

risk-taking incentives is by asking banks to keep more equity capital. Better-