If you were designing a financial system from scratch, in 2024, would you come up with banking?

 That central traditional trick of banks — that they fund themselves with safe short-term demand deposits, and use depositors’ money to invest in risky longer-term loans, with all of the run risk and regulatory supervision and It’s a Wonderful Life-ness that that involves — would you recreate that if you were starting over?

Plenty of people — insurance companies, retirement savers — want to earn a return on their money and don’t need it anytime soon; their money can be locked up in long-term loans. 

The money that people keep in the bank just to pay rent and buy sandwiches doesn’t need to be pooled and invested in risky loans; it should just sit in the vault.

This idea — that bank deposits should just sit in the vault (or, realistically, in electronic money at the Federal Reserve), while risky loans should be funded by long-term investors who intend to take those risks — is sometimes called “narrow banking.” 

All those crises! The traditional business of banking is necessarily crisis-prone; using risky long-term loans to back risk-free short-term demand deposits involves a fundamental mismatch, and every so often that flares up into a crisis.

Since 2008, but more visibly since last spring, banking really has become narrower. 

Banks have the relationships and technology to make loans, but not the money, so they partner with private credit to fund the loans.

Matt Levine Bloomberg 1 maj 2024

https://www.bloomberg.com/opinion/articles/2024-05-01/banks-are-still-where-the-money-isn-t

The Only Way to Stop Bank Runs Is to Get Rid of Banks

Paul J. Davies Bloomberg 25 april 2023

https://englundmacro.blogspot.com/2023/04/the-only-way-to-stop-bank-runs-is-to.html