Brian Romanchuk — Are Banks Special? Yes And No.

Brian provides an excellent summary of the financial system and the role of banks in it.

Whether banks are "special" is a fundamental theoretical question, and what side economists are on does not seem to be driven by politics or the mainstream/heterodox divide. The fact that the answer is somewhat ambiguous allows this division to remain.

I will discuss the implications in later articles. But it is clear that reforms need to take into account the fact that the formal banking system is not particularly special in terms of its role during an expansion. Aggressive regulation of the banking system, such as a 100% reserve requirement, would just drive activity into the shadow banking activities undertaken by both financial and "nonfinancial" firms. Such an outcome would probably make the inevitable future financial crises even worse.

 Bond Economics
Are Banks Special? Yes And No.
Brian Romanchuk