NARROW BANKING

Summary: Narrow banking is a proposed type of bank called a narrow bank also called safe bank. Ultimately, if adopted widely, this could lead to an entirely new banking system. Narrow banks could, by risk reduction measures designed into the narrow bank concept, significantly reduce potential bank runs and the need for a deposit insurance provided by the government or the central bank. It is sometimes suggested to be an improvement upon fractional reserve banking. Narrow banking would restrict banks to holding liquid and safe government bonds. Lending would be the function of other financial intermediaries. That is, the deposit taking and payment services would be separated from financial intermediation activities. In such a concept two different types of banks (financial companies) would exist, one for each activity. This concept comes from the US and goes back to Great depression and occasionally reemerges during financial crisis periods. In spite of sharp criticism of this concept in the past, during the current financial crisis, it is back on the scene and is particularly confronting the "too big to fail" approach. In this context what is important are the concepts of treating systemically important financial institutions in the G20 papers, including prudential regulation, as well as discussions of analysts and practitioners arguing that the bailing of banks using the taxpayers money, known as "bail-out" should be replaced by "bail-in", using the stakeholders money.