Return to Narrow Banking

Ultimately the “correct solution” to the US’s banking troubles are not going to come from a simple return to narrow banking or a switch to macro-prudential banking either. While macro-prudential banking looks in its early stages to be working in Columbia and Spain, it has no proven success in an advanced economy, and its reliance on data and data analysis is fairly dangerous. While of course new is not always “bad,” when dealing with the American economy I think it is essential to start off with a system that has been proven to work soundly, and then implement smaller reforms on this system to make the system work even better. On the other hand, simply narrow banking (completely separating commercial and investment banks) appears to be pretty restrictive on both the commercial and investment sector and would thus lower potential economic growth. The “too big to fail” proposal, while it has many positive aspects, really seems like an answer to only part of the problem.

The best solution I believe will take aspects from all three, and the banking solution I propose does this to some degree. Narrow banking- when done correctly- has worked very well in the past for the American economy: From post-WWII up through the late 90’s, the US was essentially void of any long (1+ year) recessions, outside of those due to extreme jumps in oil prices (rise in OPEC oil prices in 1973 along with Vietnam spending and also 1981 with jump in oil prices due to the Iranian Revolution). This was while following a strict narrow banking strategy as imposed by the Glass Steagle Act. As a reference, prior to the implementation of narrow banking there were over 10 recessions of 1+ year in the US in the previous 100 years (including a number that lasted over 2 years). With less enforcement of the act in the 1990s and finally the repeal of it in 1999, investment banks quickly began playing the role of commercial banks and taking on deposits, and commercial banks began selling off their deposits as investments. Quickly this led to the worst financial crisis in the US since the Great Depression. However, it is important to remember that while the financial crisis did emerge from the mixing of banking roles, extreme economic growth occurred initially. The best solution should seek to embrace this economic growth while preventing large financial crises that can stagnate it.

Interested to see what people have to say- I think narrow banking when done properly has worked for us. is the DU community for a return to narrow banking, switch to macro-prudential, or alternative solution.

For the recs but I am interested to get some feedback!

The continuation of my article can be found on my blog talkpoliec.blogspot.com if anyone is interested in reading more!

Can you offer some links we can use to educate ourselves about the options?

Narrow Banking: http://www.bcb.gov.br/Pec/seminarios/SemMetInf2007/Port/KevinJames.pdf

also http://en.wikipedia.org/wiki/Narrow_banking should give the basics


Macro-Prudential Regulation: http://www.ephilipdavis.com/macroprudential_regulation%5B1%5D.pdf

http://en.wikipedia.org/wiki/Macroprudential_policy


My own proposal can be found on my blog - talkpoliec.blogspot.com - what I propose is a less restrictive narrow banking with more freedom for banks.






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Submitted the article to Krugman for feedback- he is usually quick to get back to me so hopefully he has some kind words.