Narrow Banking

Nesta’s hard-hitting report argues for the radical redesign of the financial services industry.

Nesta’s hard-hitting report argues for the radical redesign of the financial services industry.

Key findings:

The proposals made in this paper develop the concept of narrow banking. The model of narrow banking is one in which all retail deposits are secured on safe assets. The argument for narrow banking rests on three elements:

  1. The existing structure of financial services regulation has failed. 
  2. The most effective means of improving customer services and promoting innovation in retail financial services is market-oriented.
  3. A serious problem arises from the ability of conglomerate financial institutions to use retail deposits which are guaranteed by government as collateral for their other activities. This encourages irresponsible risk taking. 

Professor Mervyn King, Governor of the Bank of England, described the Narrow Banking report, published by Nesta and the Centre for the Study of Financial Innovation, as "probably... the most important piece [of work] on regulation in ten years" to the Treasury Select Committee.

 

The report argues that the only way to fix the UK's banking sector is to split finance in two: a regulated sector handling savings, and a unregulated sector for wholesale finance. Economist John Kay argues that this split between "utility" and "casino" banking will make the system more safe, and encourage innovation that acts in the interests of consumers, rather than of bankers.

Read the report in full here and take a look at the full FAQs that John has published to support it.

 

Author:

John Kay is a visiting Professor of Economics at the London School of Economics, a Fellow of St John’s College, Oxford. 

He is a Fellow of the British Academy, a Fellow of the Royal Society of Edinburgh, and a member of the Scottish Government’s Council of Economic Advisers.