TIL: Narrow banking

Fascinating history that feels very relevant today: there was recently a bank startup called TNB that tried to offer “narrow banking” which would have offered deposit accounts and plops the result directly in the Fed, passing interest to customers (nearly 2% in 2018, although obviously finance people use the obfuscated language of “basis points” to make everything seem more complicated than it really is). The opposite of fractional-reserve banking.

The Fed did not approve this, and the startup says it “seeks to offer” narrow banking to this day – it cannot accept deposits.

This is relevant to today because runs are impossible in a narrow bank, and FDIC deposit insurance (which has a $250,000 limit) is not necessary. A regular bank takes your money in deposit and immediately loans it out. The bank has a lot of money in absolute terms sitting around liquid so that customers can withdraw approximately whenever they want to, but most money they hold is actually loaned out and therefore illiquid, such that if too many of their customers withdraw at once they will not be able to access it. (This is what happened to SVB.) By contrast, a narrow bank is much simpler; it can always get all of your money immediately from the Fed.

The inimitable Matt Levine covered TNB in more approachable language. Basically, if we had that, then why would regular depositors put their money in a regular bank? Maybe they wouldn’t. And if customers didn’t use regular banks at scale, then maybe your Chase Bank and your Bank of America don’t exist any more, and maybe it’s hard to figure out of that’s bad for society or not.

So the Fed just stonewalled. I have no position on whether this was right or wrong. But it’s pretty weird! Runs are impossible in a narrow bank, but also probably business loans of various kinds are more expensive. Maybe that’s worse?

Micah R Ledbetter @micahrl