Emergent narrow banking

 We have talked a few times recently about, like, the theory of banking. That theory goes roughly like this. 

Banks fund themselves with deposits, which are basically short term and safe: If you have $100 in a bank account, you expect that it will always be worth $100, and you expect to be able to withdraw five $20 bills any time you want. Meanwhile banks invest their money in assets (loans, bonds) which are basically long term and risky: Banks make loans to risky businesses that don’t have to be repaid for years. 

This business — “fractional reserve banking,” it is often called  — is inherently risky and fragile. Everyone knows this

No, this is bad, it’s antiquated, we should fix it. Let’s get rid of fractional reserve banking and do something else.

Conceptually the main way to do that goes something like this:

Banks should take short-term safe deposits and invest them in short-term safe assets. 

Long-term risky assets should be funded with long-term risky liabilities. 

This is loosely speaking called the “Chicago plan,” or “narrow banking.” 

Matt Levine Bloomberg 20 april 2023

https://www.bloomberg.com/opinion/articles/2023-04-20/banking-gets-a-bit-narrower

Gamla Mor Anna och bankernas affärsmodell

https://englundmacro.blogspot.com/2023/03/gamla-mor-anna-och-bankernas.html

This idea of 100% reserves on checking deposits would be advocated by other economists in the 1930s, including Lauchlin Currie of Harvard and Irving Fisher of Yale.

A more recent variant of this reform idea is to be found in the "narrow banking" proposal.

https://englundmacro.blogspot.com/2023/03/banking-stands-revealed-as-part-of.html