A “narrow” bank would keep its money at the Federal Reserve and leave the risk-taking to other financial companies—but the Fed isn’t a fan.
Alex Harris
collapse of three regional US banks this spring is a reminder that, at their heart, banks are risk-taking businesses. For most depositors, banks are risk-free thanks to federal insurance of as much as $250,000. That’s why “like money in the bank” is shorthand for a sure thing. In reality, of course, the money that people keep in the bank isn’t sitting in cash. Deposits are a liability of the bank—a short-term debt it owes to its customers. On the other side of its balance sheet are a bank’s longer-term loans and investments. If its bets go the wrong way at the same time that many depositors want their money back, it’s in trouble. That’s what happened to Silicon Valley Bank and its fellow failures.
But what if a bank did hold all its customers’ deposits safely in cash, or something exactly like it—and left lending to other institutions where investors know they’re taking a risk by giving them their money. The idea is sometimes called “narrow” banking, because it reduces a bank to its most mundane function. The US Federal Reserve has tools to make this possible but has argued it could upend how the financial system works. “The Fed is negative on narrow banks,” says Campbell Harvey, a finance professor at Duke University.
