Shouldn't have deposit insurance period. Banks don't lend deposits. The deregulation of interest rates was an early 60's conspiracy and a mistake. Banks pay for the deposits that the system already owns.
What's the purpose of a narrow bank if it cannot create credit? The whole idea is that of another intermediary. In the past, the FSLIC and NCUA insured the thrifts.
The problem is that Powell thought banks were intermediaries between savers and borrowers. The idea that an IORB level above inflation represents a tight money policy is sheer idiocy. Bank credit hasn't slowed down. The banks still have a positive carry trade. Reminds me of Volckerism.
Regulation also adds complexity via anrbitrage and helicopter money breeds reckless risk taking. Those were lessons of the GFC, too.
Basel II had zero percent risk weightings for “AAA” securities and Ben made treasuries unattractive, low ROA investments. No prob- the street will manufacture “AAA” securities that yield just a bit more.
Of course, banks themselves are nothing more than CDOs.
There is the AAA tranche (deposits)
Their investment grade bonds
And their equity.
Choose your poison. CDOs are actually a lot better than banks as you know exactly what is in the portfolio and there are fewer employees to skim off earnings and make stupid decisions.
I believe in the Mervyn King model of banking - a lot less leverage. More like a closed end fund or CDO your deposit is just a share of the assets. The banks doesn’t need to raise funds to pay off your deposit withdrawals- you just sell your share in the portfolio at the market price (which can be heavily discounted).
Problem is that voters and pols like easy money and boom times. Restricting credit and reducing leverage is not a vote winner. I remember that in 2008, Obama’s campaign idea for the lending market was to make mortgages easier to get.😊
Your point about manufactured “AAA” securities gets to the incentive: a regulatory label becomes something Wall Street designs around.
The Dodd–Frank Wall Street Reform and Consumer Protection Act addressed this directly. Section 939A instructed federal agencies to “remove any reference to or requirement of reliance on credit ratings” from the regulations identified in their review.
In plain English: a rating cannot substitute for the required assessment of creditworthiness. National-bank investment rules require banks to understand the risks of the securities they buy.
My proposed reform: a standard investment worksheet showing underlying borrowers, concentrations, loss assumptions, and the conditions under which the senior tranche starts losing principal.
Which assumption would you require a bank to defend before purchasing a structured bond? Give me one concrete change.
Dodd Frank didn’t exactly cover itself in glory. Instead of “no more bailouts” we now have the taxpayers underwriting all large commercial deposits (formerly uninsured).
The payment account the Fed proposed in May keeps that door shut too, since it pays no interest on balances. TNB waited over six years before the New York Fed turned down its master account in December 2023.
Echoes of a 2016 Grumpy Economist post about competition in our economy....Why are there only X number of insurance companies? Banks? Oil Companies? Health care companies? etc
Worth putting the mirror case next to this. Executive Order 14330, August 2025, told the SEC and Labor to open 401(k) plans to private credit funds for the first time. Same agencies, moving quick in the permissive direction, for an industry that wanted in. Six months later Blue Owl gated OBDC II and somewhere around five billion dollars of investor money stopped being available.
Which is why I don't read the pattern as caution. Reads more like whoever is in the room.
I wonder what you think of Arnold Kings point that the role of banks is taking short term liabilities and turning them into long term. This creates credit that, if thin banking is where most people put there money, would dry up.
That is historically true, but no longer necessary. There is enough government debt to provide all the risk-free assets people want. And equity markets, securitization, mutual funds, long-term debt all offer ways to make risky lending without deposits plus occasional bailouts.
Stable coins should be regulated like money market funds. Their holdings need to be disclosed as well as defined. And just as you can “exchange funds” (move from one fund to another) at a Vanguard or Fidelity you should be able to exchange your crypto asset for another. All transactions should be reported on a 1099.
When it comes to making payments, there should be a level playing field. If same day payments are allowed in crypto then they should be allowed in money market funds.
I can’t see why anybody be would invest in a stable coin that doesn’t pay interest when money market funds are available.
If they are well regulated and on a level playing field then agree they should be allowed to pay interest.
The narrow-bank proposition stands or falls on its own economics. If its only asset is reserves and reserves yield 0%, it cannot pay deposit interest out of reserve income.
That reduces the issue to first principles: if a narrow bank provides safekeeping and payments only, depositors must pay for those services. It cannot engage in risk-free arbitrage at the expense of the Federal Reserve System's 12 Federal Reserve Banks.
"If the narrow bank's only asset is reserves #and# reserves yield 0%, the narrow bank cannot pay depositors interest out of the narrow bank's reserve income, as it has none."
Yes, Swiss banks charge fees to safeguard your cash and bonds, but so too do American banks. That is not an argument for a narrow bank.
Zero is not a constraint, but it removes the risk-free arbitrage opportunity that makes a narrow bank an attractive investment proposition for an equity investor.
You are ignoring the fact that the largest customers for cyber currencies are gamblers, tax cheats, smugglers, drug lords, terrorists, and hostile foreign powers and their minions who are under sanctions.
Cyber coins and the like are just old fashioned certificates of deposit wrapped in nerd technobabble and cyber bovine excrement . Any one who issues them in the United States must be regulated by banking regulators. They must be capitalized, reserved, and audited like old fashioned brick and mortar banks. They must be subject to Know Your Customer (KYC) and Anti Money Laundering (AML) rules the same way the bankers you hate so much are.
Anything less invites not mere economic chaos, but overdose deaths, targeted assassinations, and terrorist bombings. Anyone old enough to remember 9/11, anyone whose lost a child to drug addiction, anyone who is opposed to Russian aggression against Ukraine, Iran's reign of terror over the Middle East, or China's reign of terror against its own citizens and aggression towards Taiwan and the Philippines, should demand that cyber currencies should rigorously regulated before being allowed into the United States.
The banks may be acting out of selfish motives, but that does not make them wrong.
Then the risky entrepreneurial projects are funded by equity and long-term debt only? Could this imply less economic prosperity or where is the logical mistake on my side?
Shouldn't have deposit insurance period. Banks don't lend deposits. The deregulation of interest rates was an early 60's conspiracy and a mistake. Banks pay for the deposits that the system already owns.
How does everyone having a master account prevent runs?
Good way to bring down the entire system.
100% backing prevents runs. If people want their money, they can all get it.
Just couldn't wrap my head around it. They have 2 accounts. One at a DFI and everyone has a "master account"? That's funny. It might work.
Guess I should ask chat gpt what you're talking about.
What's the purpose of a narrow bank if it cannot create credit? The whole idea is that of another intermediary. In the past, the FSLIC and NCUA insured the thrifts.
The problem is that Powell thought banks were intermediaries between savers and borrowers. The idea that an IORB level above inflation represents a tight money policy is sheer idiocy. Bank credit hasn't slowed down. The banks still have a positive carry trade. Reminds me of Volckerism.
Yes, though NAV may not be 100pct….as when the money market funds were buying “super AIV” A2/P2 commercial paper during the GFC.
If it is t-bills only then that is great, though Tether has all sorts of garbage (and bullion).
THE biggest source of monopoly economy wide is bad regulation. George Stigler understood why that happens.
Keep It Simple. Complexity adds risk. We saw in 2008 what happens when complexity adds risk that is not understood.
Regulation also adds complexity via anrbitrage and helicopter money breeds reckless risk taking. Those were lessons of the GFC, too.
Basel II had zero percent risk weightings for “AAA” securities and Ben made treasuries unattractive, low ROA investments. No prob- the street will manufacture “AAA” securities that yield just a bit more.
Of course, banks themselves are nothing more than CDOs.
There is the AAA tranche (deposits)
Their investment grade bonds
And their equity.
Choose your poison. CDOs are actually a lot better than banks as you know exactly what is in the portfolio and there are fewer employees to skim off earnings and make stupid decisions.
I believe in the Mervyn King model of banking - a lot less leverage. More like a closed end fund or CDO your deposit is just a share of the assets. The banks doesn’t need to raise funds to pay off your deposit withdrawals- you just sell your share in the portfolio at the market price (which can be heavily discounted).
Problem is that voters and pols like easy money and boom times. Restricting credit and reducing leverage is not a vote winner. I remember that in 2008, Obama’s campaign idea for the lending market was to make mortgages easier to get.😊
Your point about manufactured “AAA” securities gets to the incentive: a regulatory label becomes something Wall Street designs around.
The Dodd–Frank Wall Street Reform and Consumer Protection Act addressed this directly. Section 939A instructed federal agencies to “remove any reference to or requirement of reliance on credit ratings” from the regulations identified in their review.
In plain English: a rating cannot substitute for the required assessment of creditworthiness. National-bank investment rules require banks to understand the risks of the securities they buy.
My proposed reform: a standard investment worksheet showing underlying borrowers, concentrations, loss assumptions, and the conditions under which the senior tranche starts losing principal.
Which assumption would you require a bank to defend before purchasing a structured bond? Give me one concrete change.
Act: https://www.congress.gov/111/plaws/publ203/PLAW-111publ203.pdf
Statutory location: https://www.law.cornell.edu/uscode/text/15/78o-7
CFR rule: https://www.ecfr.gov/current/title-12/section-1.5
Dodd Frank didn’t exactly cover itself in glory. Instead of “no more bailouts” we now have the taxpayers underwriting all large commercial deposits (formerly uninsured).
Agree more transparency is better (eg your idea).
Great work I’m contributing this policy idea to you
The payment account the Fed proposed in May keeps that door shut too, since it pays no interest on balances. TNB waited over six years before the New York Fed turned down its master account in December 2023.
Echoes of a 2016 Grumpy Economist post about competition in our economy....Why are there only X number of insurance companies? Banks? Oil Companies? Health care companies? etc
There are thousands of banks.
Worth putting the mirror case next to this. Executive Order 14330, August 2025, told the SEC and Labor to open 401(k) plans to private credit funds for the first time. Same agencies, moving quick in the permissive direction, for an industry that wanted in. Six months later Blue Owl gated OBDC II and somewhere around five billion dollars of investor money stopped being available.
Which is why I don't read the pattern as caution. Reads more like whoever is in the room.
I wonder what you think of Arnold Kings point that the role of banks is taking short term liabilities and turning them into long term. This creates credit that, if thin banking is where most people put there money, would dry up.
That is historically true, but no longer necessary. There is enough government debt to provide all the risk-free assets people want. And equity markets, securitization, mutual funds, long-term debt all offer ways to make risky lending without deposits plus occasional bailouts.
Stable coins should be regulated like money market funds. Their holdings need to be disclosed as well as defined. And just as you can “exchange funds” (move from one fund to another) at a Vanguard or Fidelity you should be able to exchange your crypto asset for another. All transactions should be reported on a 1099.
When it comes to making payments, there should be a level playing field. If same day payments are allowed in crypto then they should be allowed in money market funds.
I can’t see why anybody be would invest in a stable coin that doesn’t pay interest when money market funds are available.
If they are well regulated and on a level playing field then agree they should be allowed to pay interest.
The narrow-bank proposition stands or falls on its own economics. If its only asset is reserves and reserves yield 0%, it cannot pay deposit interest out of reserve income.
That reduces the issue to first principles: if a narrow bank provides safekeeping and payments only, depositors must pay for those services. It cannot engage in risk-free arbitrage at the expense of the Federal Reserve System's 12 Federal Reserve Banks.
Reserves pay interest. Swiss banks charge interest to hold your money. 0 is not a constraint.
"If the narrow bank's only asset is reserves #and# reserves yield 0%, the narrow bank cannot pay depositors interest out of the narrow bank's reserve income, as it has none."
Yes, Swiss banks charge fees to safeguard your cash and bonds, but so too do American banks. That is not an argument for a narrow bank.
Zero is not a constraint, but it removes the risk-free arbitrage opportunity that makes a narrow bank an attractive investment proposition for an equity investor.
You are ignoring the fact that the largest customers for cyber currencies are gamblers, tax cheats, smugglers, drug lords, terrorists, and hostile foreign powers and their minions who are under sanctions.
Cyber coins and the like are just old fashioned certificates of deposit wrapped in nerd technobabble and cyber bovine excrement . Any one who issues them in the United States must be regulated by banking regulators. They must be capitalized, reserved, and audited like old fashioned brick and mortar banks. They must be subject to Know Your Customer (KYC) and Anti Money Laundering (AML) rules the same way the bankers you hate so much are.
Anything less invites not mere economic chaos, but overdose deaths, targeted assassinations, and terrorist bombings. Anyone old enough to remember 9/11, anyone whose lost a child to drug addiction, anyone who is opposed to Russian aggression against Ukraine, Iran's reign of terror over the Middle East, or China's reign of terror against its own citizens and aggression towards Taiwan and the Philippines, should demand that cyber currencies should rigorously regulated before being allowed into the United States.
The banks may be acting out of selfish motives, but that does not make them wrong.
Hi John, 100% in agreement. I've written a post on this last May: https://blogs.law.ox.ac.uk/oblb/blog-post/2026/05/yes-stablecoins-should-be-permitted-pay-interest.
Narrow banks don't create new money
Great work
Then the risky entrepreneurial projects are funded by equity and long-term debt only? Could this imply less economic prosperity or where is the logical mistake on my side?