Simple banking: it is not that complicated

Abstract

In an ever-changing, and ever more cumbersome, regulatory environment banks face increased risk management costs, and in the wake of the banking failures of 2008 and more recent banking scandals related to money laundering, the question that looms ahead is whether the need for a different approach to risk management, mitigation and transformation is warranted and whether such an approach can reduce risk, improve profitability and offer true value to customers. Safety and security are the staple of banks, without which they will run into trouble. This paper proposes a different approach to retail banking, built on an 80-year-old economic theory. The idea of narrow banking, or full reserve banking, centres on keeping deposits 100 per cent secure by offsetting them with risk-free assets on the bank’s balance sheet. This paper will discuss the feasibility of this approach and how it can be implemented to tackle some of the most critical issues and concerns from a regulatory perspective in banking.