Narrow banking
As narrow banking (of English. Narrow limits =) the conceptual model of a banking system is called, give in the banks just as much money as they have available. This is called deadline congruence .
background
One of the three essential functions of credit institutions is maturity transformation . Money investors typically only want a short fixed interest period, while borrowers want long-term interest rate security. Banks now refinance long-term loans partly with short-term deposits. As a result, they bear the interest rate risk and a liquidity risk . In extreme cases, a bank run can occur.
The Narrow Banking Approach
Narrow banking approach consists of the specification of the exact correspondence of the maturity structure of the bank's loans and liabilities (corresponds to a complete congruence of maturities). This ensures that the bank can meet its payment obligations under all circumstances. A modified proposal from Narrow Banking calls for the bank to liquidate parts of its investments in order to be able to service unexpected withdrawals. The liquidation proceeds from the bank's investments must cover the maximum possible withdrawal at a time. Such narrow banking comes very close to self-sufficiency, i.e. a world without a bank.
This avoids the risk of the bank's illiquidity - albeit at the price that the bank can no longer perform the function of maturity transformation.
Narrow banking is a thought model of the theory of financial intermediaries .
Problem areas in narrow banking
On the one hand, it is difficult to find secure investments with matching maturities. On the other hand, the question is how effective the shielding is. The firewall, which is supposed to separate the deposit business from the risky financial business, could be circumvented and thus become ineffective. You can also show that a credit squeeze would set in. The advantage of intermediation (bank as financial intermediary) as a liability and liquidity network then falls by the wayside.
In economics , narrow banking is therefore rated as inefficient.
Banking regulation in practice
In practice, banks are not subject to such rigid regulations as in narrow banking, but they are subject to intensive market regulation to avoid banking crises . In Germany, the Liquidity Ordinance regulates the amount of liquidity to be kept.
history
After the global economic crisis , various instruments were developed in the USA to increase the stability of the banking system. One of these approaches is narrow banking. Here the business of the banks is restricted to their core tasks and the deposit business is separated from the risky financial business by means of a so-called firewall (organizational shielding).
In addition to deposit insurance, a separate banking system was prescribed. In addition, spatial restrictions were imposed. The consequences for the US banking sector were: a. Splintered supervisory competencies and many special institutions (Credit Unions, Savings and Loan Associations) with their own supervisory law.
Henry C. Simons (1948) and Milton Friedman (1959) called for a 100% Reserve Bank for Depository Institutions to avoid bank runs and prevent banks from creating money.
The opposing position to this were the demands for more diversification and the economies of scale or economies of scope arguments. You spoke out in favor of deregulation. This opposite position is also known as free banking .
Web links
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- ↑ Prof. Peter Welzel ( page no longer available , search in web archives ) Info: The link was automatically marked as defective. Please check the link according to the instructions and then remove this notice.
