The Only Way to Stop Bank Runs Is to Get Rid of Banks
It has been one of the ideas often proposed since the 2008 financial crisis, under the name of narrow banking. It’s a idea I don’t buy, as I’ll explain.
Under the international Basel standards, a bank must be able to pay out at least 3% of retail deposits if they are fully insured
Different countries’ regulators often impose higher outflow expectations than these minimums. Maybe they could lift them a touch further, but this is all shifting proverbial deckchairs
/https://en.wiktionary.org/wiki/rearrange_the_deck_chairs_on_the_Titanic/
Liquidity rules only protect banks against fluctuations in customers’ needs for liquidity caused by economic or financial stresses outside a bank. Bank runs are totally different beasts: A run is a panic that — whether or not it had a rational cause — will almost certainly be ruinous. And typically happens much faster than 30 days!
The only way to guarantee no run is to force banks to match all deposits with assets that have cash-like qualities: For instant-access deposits, that means central bank reserves and very short-term government bills. Such a bank is a so-called narrow bank — in reality no bank at all.
It’s little more than a utility for making payments – it makes no loans and creates no money for the economy.
The main way to help prevent runs has been deposit insurance.
A bad idea would be to get governments to insure all deposits.
If all banks are narrow banks, how does anyone borrow money?
Paul J. Davies Bloomberg 25 april 2023
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