Narrow banking is a proposed type of
bank
A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...
called a narrow bank also called a safe bank. Narrow banking would restrict banks to holding liquid and safe
government bond
A government bond or sovereign bond is a form of Bond (finance), bond issued by a government to support government spending, public spending. It generally includes a commitment to pay periodic interest, called Coupon (finance), coupon payments' ...
s as opposed to other equities (like
loan
In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money.
The document evidencing the deb ...
s) against depositor's money as opposed to other assets (such as
gold
Gold is a chemical element; it has chemical symbol Au (from Latin ) and atomic number 79. In its pure form, it is a brightness, bright, slightly orange-yellow, dense, soft, malleable, and ductile metal. Chemically, gold is a transition metal ...
as in the case of the
Texas Bullion Depository or cryptocurrency as in the case of proposed banks like Custodi
. 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.
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
*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
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.
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.
Narrow banking institutions
In the 17th century, the
Bank of Amsterdam operated as 100% reserve.
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.
See also
*
Full-reserve banking
*
Monetary reform
*
Reserve requirement
*
Positive Money
References
Banking
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ja:ナローバンク論