large scale image
LCP Image

Back to TSCFM News

Banking is slowly getting narrower and better

May 29, 2023

Banking is slowly getting narrower and better
The US economy is now closer than it has ever been to realising one of the more radical visions in the finance industry. Slowly but surely, through evolution rather than policy dictate, America is relying less on traditional banks part of a reform known as “narrow banking.”

The basic idea is to separate lending and deposits: The banking system would hold very safe assets, such as government bonds, thereby limiting the risks from bank insolvency and bank runs, as well as the moral hazard from deposit insurance. Loans would be made by commercial credit lenders and other non-bank sources. Better maturity matching on the loan side would make the economy more resilient.
 
That’s mostly for the better, but the narrow banking model has long been plagued by two major problems. First, there have never been enough safe assets to satisfy the demands of depositors. Second, excessive investment in government securities tends to crowd out private investment. The rise of narrow banking can in part be explained by the mitigation of both these issues.
 
Unfortunately, the increased supply of US debt is mostly due to its deteriorating fiscal position. Currently the total stock of US government securities outstanding is a staggering $24.3 trillion, though not all of that is short term. The bright side is that asset holders have a greater number and variety of safe options.

The US is still not close to a point at which Treasury bills could serve as assets and liabilities for the entire banking system. Bank deposits amounted to about $17.5 trillion in March 2023, and government securities are needed for many purposes, such as fulfilling portfolio demand abroad and as collateral at clearinghouses.

Important Links:

Recommended for you ...

Modi, Mauritius, and Sri Lanka Leaders Unveil Digital Payment Services
Modi, Mauritius, and Sri Lanka Leaders Unveil Digital Payment Services

February 12, 2024

Public Sector Banks Surpassing Private Peers, Investors Reconsidering Choices
Public Sector Banks Surpassing Private Peers, Investors Reconsidering Choices

February 12, 2024

Indian Banks Seek RBI Permission for Global Bond Trading Ahead of Inclusion in Indices
Indian Banks Seek RBI Permission for Global Bond Trading Ahead of Inclusion in Indices

February 12, 2024

Enquire Now
REQUEST A CALLBACK
Chat on WhatsApp