Narrow Banking

Authors

1 Professor of Shahid Beheshti University

2 Educator of Economic Research

Abstract

Stability is a basic requirement for the proper functioning of the banking system and
the key to its accomplishing growth and development. Repeated failures of banks
lead some economists to believe that banking and financial system suffer from
structural problems and is in need of fundamental reform.
It is necessary to examine demand and investment deposits as two distinct contracts.
Demand deposits are merely loans that are fully guaranteed by banks and must be
returned on demand. Investment deposits are given to banks on a profit-and-loss
sharing basis. That is why some economists insist on the total separation between
demand and investment deposits through subjecting the former to 100 percent
required reserves. Compared to conventional finance, this sounds like narrow
banking.
Narrow banking would improve the competitiveness of banks and makes them tend
to be more market responsive .
This article examines this kind of need for further banking reform and takes a closer
look at one alternative "narrow banking". The article discusses the need for
fundamental banking reform and provides an overview of narrow banking. Finally
the author evaluates this new system.
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Keywords