Here is a trend in modern finance: “narrow banking.”
Banks have a fundamentally risky business model, borrowing short (by taking deposits) and lending long.
In some ways it would be nice if, instead of banks with risky short-term deposits, somebody else, somebody with long-term funding, did all the risky lending.
Banks could take deposits (a risky funding model), and then invest them very safely; other investors could raise long-term equity funding (a safe funding model), and use it to make risky loans and investments.
Loosely speaking, this is called “narrow banking.”
Where can you borrow all that money?
Well, from banks, obviously. They have lots of money! They are in the business of making loans! It just makes sense.
This sort of takes us back to Step 1, doesn’t it?
The risky business itself — proprietary trading, financing leveraged buyouts — is shifted from the banks to other firms, but the other firms turn around and borrow money from the banks to help fund it.
Matt Levine is 12 juni 2024
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