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. Loans would be made by other financial intermediaries. That is, the deposit taking and payment activities would be separated from financial intermediation activities.

Attributes

Purported attributes of narrow banking include -

1. no lending of deposits
2. extremely high liquidity
3. extremely high asset security
4. lower interest rates paid to depositors
5. regulatory framework with higher level of scrutiny and operational and investing restrictions

Additional criteria applied to safe banks include -

1. no derivatives
2. no off balance sheet assets
3. high degree of institutional transparency (e.g. continuous real-time disclosure of financial records)
4. capped executive salaries
5. low risk jurisdictions

Background

Some early thought leaders in narrow/safe banking include -

1. Satyajit Das from the University of Illinois who published an early paper on the topic of narrow banking.
2. Mike Denoma who advocated the case for it early in his career (circa 2000)
3. Kevin James from the Bank of England who presented very early on in this debate

A more recent references: The Future Of The Global Financial System.

Classifications

Here is one proposed classification system for defining types of narrow banks:

Lenders have to become investors (cases PS, PL). The table below shows four different cases of narrow banking.

Classification of the Narrow Banking Proposals[1]p109
Permitted to possess short-term safe assets (S) Permitted to possess long-term safe assets (L)
as well as short-term assets
Prohibited from conducting lending activity (P) PS
 
Full-reserve banking
  		PL
 
 
 
Permitted to conduct lending activity (L) LS
This case advocated by Kobayakawa and Nakamura[1] has a synergy effect between deposit taking and lending 		LL
This case shows some similarities with
fractional-reserve banking
but is still more restricted

References

  1. 1 2 Kobayakawa; Nakamura (May 2000). "A Theoretical Analysis of Narrow Banking Proposals" (PDF). Monetary and economic studies.


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