Narrow Banking

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.