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A Theoretical Analysis of Narrow Banking Proposals


  • Kobayakawa, Shuji

    (Bank of Japan)

  • Nakamura, Hisashi

    (U Chicago)


The purpose of this paper is to examine narrow banking proposals. First, we survey the narrow banking proposals presented in the United States and Japan, and categorize them by means of two standards: (1) whether safe assets that a narrow bank is allowed to hold are limited to short-term assets, and (2) whether a narrow bank is allowed to engage in lending activity. Second, we examine the feasibility of each proposal for the purpose of achieving the stability of the financial system, making use of two theoretical models: Wallace (1996) and Kashyap, Rajan, and Stein (1998). Finally, we conclude that a desirable narrow bank is one that carries out both deposit-taking and lending activities, though restrictively, and is allowed to invest in short-term safe assets.

Suggested Citation

  • Kobayakawa, Shuji & Nakamura, Hisashi, 2000. "A Theoretical Analysis of Narrow Banking Proposals," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 18(1), pages 105-118, May.
  • Handle: RePEc:ime:imemes:v:18:y:2000:i:1:p:105-118

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    Cited by:

    1. Puri, Manju & Rocholl, Jörg & Steffen, Sascha, 2011. "Global retail lending in the aftermath of the US financial crisis: Distinguishing between supply and demand effects," Journal of Financial Economics, Elsevier, vol. 100(3), pages 556-578, June.
    2. Radojičić Jelena & Radovanović Predrag, 2015. "Narrow Banking – Banking System Without Private Issuance of Credit Money as a Solution for More Resistant Banks and More Stable Financial System," Economic Themes, Sciendo, vol. 53(3), pages 376-397, September.
    3. Ghosh, Saibal & Saggar, Mridul, 1998. "Narrow Banking: Theory, evidence and prospects in India," MPRA Paper 17352, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages


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