Narrow banking

Narrow banking is a proposed type of bank called a narrow bank also called a safe bank. Narrow banking would restrict banks to holding liquid and safe government bonds as opposed to other equities (like loans) against depositor's money as opposed to other assets (such as gold as in the case of the Texas Bullion Depository or cryptocurrency as in the case of proposed banks like Custodia [1]). Making private loans or holding other depositors would be made by the other financial intermediaries along with only holding depositor money is what separates such banks from full-reserve banks. In other words, the function and operation of such banks is very narrow. That is, the deposit taking and payment activities would be separated from financial intermediation activities.

Concept and structure

Narrow banks' business model differs from traditional commercial banks. Instead of borrowing short-term deposits to make long-term loans, narrow banks would back demand deposits with 100% central bank reserves or short-term government securities.[1]

Key characteristics include:

Asset restrictions: Banks would be restricted to holding safe assets like government bonds.[1]

Functional separation: Deposit taking and payment functions would be separated from lending, which would be funded through uninsured deposits and capital. Money market funds might become an important source of finance for households and develop expertise in originating credit.[1]

Fee-based revenue model: Since narrow banks cannot earn income from lending, they would be fee-driven.[2]

Narrow banking contrasts with full-reserve banking, which typically allows banks to make loans using equity capital or time deposits, while backing demand deposits with 100% reserves.[3]

Background

Some early thought leaders in narrow/safe banking include:

  • Acharya, Sankarshan, Ph.D., from the University of Illinois at Chicago, who published an early paper titled "Safe Banking" in the J. of American Academy of Business, Sept. 2003, on the topic of narrow banking [4]
  • Kevin James from the Bank of England who made a slide presentation to the Banco Central do Brazil (see: James, Kevin R., "The Case for Narrow Banking", May 2007, Sao Paulo, Brazil, https://www.bcb.gov.br/Pec/seminarios/SemMetInf2007/Port/KevinJames.pdf ) early on in this debate [5]

In 2019, the Federal Reserve denied approval for such banks in the U.S., claiming that they would: interrupt implementation of monetary policy, threaten the repo market, and that the bank is 'too safe' and would thereby threaten general financial stability.[6][7]

Tyler Cowen has argued that taken as a whole, recent changes by banking regulators in 2023 may be unintentionally leading to the emergence of a more narrow banking system of incentives in the banking industry, separating deposits and payments from financial intermediation like borrowing and lending.[8]

Narrow banking institutions

In the 17th century, the Bank of Amsterdam operated as 100% reserve.[9]

The Mit Ghamr Savings Bank in Egypt ran from 1963-67. It neither charged nor paid interest but shared profit. Islamic banking and finance requires tying financial transactions to real assets.[10]

See also

References

  1. ^ a b c Barwell, Richard (2017-02-27). Macroeconomic Policy after the Crash: Issues in Microprudential and Macroprudential Policy. Springer. ISBN 978-3-319-40463-9.
  2. ^ Bordo, Michael D.; Eitrheim, Øyvind; Flandreau, Marc; Qvigstad, Jan F. (2016-06-09). Central Banks at a Crossroads: What Can We Learn from History?. Cambridge University Press. ISBN 978-1-107-14966-3.
  3. ^ Nageswaran, V. Anantha; Natarajan, Gulzar (2019-05-23). Financial Globalisation: Causes, Consequences and Cures. Cambridge University Press. ISBN 978-1-108-48234-9.
  4. ^ "Safe Banking - An excellent, early, thought leader's view. - Safe Bank Central". sites.google.com. Archived from the original on 7 April 2019. Retrieved 7 April 2019.
  5. ^ "The Case for Narrow Banking - Safe Bank Central". sites.google.com. Archived from the original on 7 April 2019. Retrieved 7 April 2019.
  6. ^ Matt Levine. "The Fed Versus the Narrow Bank". Archived from the original on 2023-03-17. Retrieved 2023-05-26.
  7. ^ Malz, Allan M. (2024-10-22). Contemporary Finance: Money, Risk, and Public Policy. John Wiley & Sons. ISBN 978-1-394-17963-3.
  8. ^ Banking Is Slowly Getting Narrower — and Better, Bloomberg, 26 May 2023.
  9. ^ Zelmanovitz, Leonidas (2015-12-24). The Ontology and Function of Money: The Philosophical Fundamentals of Monetary Institutions. Lexington Books. ISBN 978-0-7391-9512-3.
  10. ^ Linsley-Parrish, Jamie (6 November 2024). "The Rewards and Risks of Islamic Finance". JSTOR Daily.


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