Entry Restriction, Shadow Banking, and the Structure of Monetary Institutions

Entry restriction has a noble pedigree in banking law. Soon after the founding of the Bank of England in 1694, Parliament forbade all other business entities apart from small partnerships from issuing bank notes and their equivalents. Subsequent acts of Parliament confirmed that the object of the prohibition was to give the Bank of England the “privilege or power” of “exclusive banking.” In the United States, similar prohibitions, called “restraining acts,” were established at the state level in the early nineteenth century. Later, when Congress established the national banking system in the early 1860s, it prohibited (through the device of punitive taxation) all other entities from issuing bank notes. Entry restriction remains at the core of U.S. banking law today: it is axiomatic that no person or entity may maintain “deposit” liabilities without a banking charter.Entry restriction laws take the form of a blanket prohibition, binding not on banks but on everyone else. These laws define the privilege that a banking charter conveys; a banking charter confers an exemption from the prohibition. It is noteworthy that these prohibitions apply to a particular liability structure. The liabilities in question — bank notes and deposits — are widely understood to serve a distinctly monetary function. A central object of entry restriction laws, then, is to confine “money” creation to the government itself and to one or more specially chartered banks.When it comes to modern financial stability regulation, a seldom asked question is whether banking law's traditional entry restriction provisions might be due for modernization. This question is among the topics addressed in a recently published book, The Money Problem: Rethinking Financial Regulation (University of Chicago Press), in which I argue that financial instability is largely a problem of monetary system design. This brief article expands on the book's treatment of the entry restriction question