Monetary and Economic Studies Vol.18, No.1 / May 2000

A Theoretical Analysis of Narrow Banking Proposals

Shuji Kobayakawa, Hisashi Nakamura

The purpose of this paper is to examine narrow banking proposals. First, we survey the narrow banking proposals presented in the United States and Japan, and categorize them by means of two standards: (1) whether safe assets that a narrow bank is allowed to hold are limited to short-term assets, and (2) whether a narrow bank is allowed to engage in lending activity. Second, we examine the feasibility of each proposal for the purpose of achieving the stability of the financial system, making use of two theoretical models: Wallace (1996) and Kashyap, Rajan, and Stein (1998). Finally, we conclude that a desirable narrow bank is one that carries out both deposit-taking and lending activities, though restrictively, and is allowed to invest in short-term safe assets.

Keywords: Narrow bank; Bank run; Integrated operation of deposit-taking and lending services; Liquidity

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2000 Bank of Japan All Rights Reserved.

Home Japanese Home