Time for narrow banking?

Published: Mar 2022

With the world in turmoil, and the threat of inflation raising rates thereby making historic debt loads unsustainable, not to mention little understood derivative risks at banks, treasurers face a tough time as guardians of company cash and guarantors of liquidity. This is a good time to revisit the repeal of Glass-Steagall in 1999, and even further to consider the merits of narrow banking.

Old brick door arch in village

Narrow banking

The term narrow banking can cover a variety of bank structures, ranging from Glass-Steagall era “banks” which did run loan books but were excluded from investment banking activities to banks which place all their deposits as deposits in turn with their central bank. The latter – more narrow definition – means not participating in fractional reserve banking aka printing money.

Of course, the more narrow definition is close to what might be achieved with Central Bank Digital Currencies (CBDCs), depending how it is implemented. CBDCs are much discussed but remain in pilot mode in a few jurisdictions. Responsible central bankers state that implementing CBDC should be a political decision, not a central bank decision, and there are many objections to CBDCs – not least that most of the societal benefits can be achieved through other (less disruptive) means.

Of course, with (most Western) governments inundated with historical debt levels (which keep growing to new highs) and untenable pension and health care obligations, a sceptical treasurer may have reservations about even central bank money. But for now, unless they want to hold gold or more dubiously cryptocurrencies, fiat currency remains the only liquid and generally accepted medium of exchange.


For the purposes of this article, “narrow bank” will refer to the more narrow bank described above ie a bank that places all its customer deposits with its central bank, and does not engage in lending, securities, derivatives, etcetera.

Such a bank can serve corporates with deposit (store of value) and cash management services (exchange of value) services, but not lending, trading, issuance, hedging, etcetera.

From both deposit and cash management perspectives, a narrow bank offers considerable benefits for corporates.

Start with deposits. Treasurers usually think about investments in terms of the acronym SLY (security, liquidity, yield):

  • Security (do not lose cash).
  • Liquidity (keep cash available).
  • Yield (earn interest on cash).


For now, central bank funds – despite the risk of inflation devaluing fiat currency – remain the most secure and liquid store of value potentially available to treasurers.

In the past decades, amidst rolling banking crises, a number of large corporates have applied for banking licences primarily to gain access to central bank deposits. But this is an expensive and complex method that is only available to very large corporates, and the cost, complexity and risk of banking licences only keeps growing.

From this perspective, a narrow bank offers near direct access to central bank funds, and therefore the most secure store of value possible within the constraints of fiat currency.


As for security, so for liquidity. There is no more liquid investment than central bank funds. The scale and ubiquity of fiat currency mean that they have higher availability and lower costs than any alternatives such as securities, gold, cryptocurrencies, and so forth.

Since a narrow bank will not be lending out funds, and therefore has no liquidity gap and no risk of a run on funds (because corporate deposits are in turn deposited with its central bank), narrow bank deposits represent the most liquid investment product imaginable within the constraints of fiat currency. Currently, most treasurers consider short-term sovereign debt (eg US Treasury Notes) to be the most liquid investment, but even these most liquid instruments require a well-functioning trading market, and we have seen these dry up (eg 2019 Repo crisis).


Treasurers fully understand that SLY is in order of importance, and they know that loosing cash or not having cash available are unacceptable outcomes. But yield is the easiest metric to measure and in practice often the most discussed. And many would fear that a direct pass through to central bank funds would offer unexciting yields.

Indeed, narrow bank deposits preclude playing the yield curve and arbitraging credit risk. And they effectively preclude outsourcing those things to lending banks, which is the current reality. On the other hand, the capital costs and organisational complexity that arise from lending and fractional reserve banking impose huge costs on lending banks, and those costs are passed on and marked up to corporates and other customers.

While a narrow bank is precluded from tenor and credit risk arbitrage, it has a great opportunity for cost arbitrage. Thus a narrow bank can compete effectively with lending bank demand deposit offerings.


Narrow bank deposits will be treated like other bank deposits – at par. This makes them more attractive from an accounting perspective than high liquidity money market funds (liquidity funds), which are commonly used by corporates as a store of value.

Ever since Reserve Primary Fund ‘broke the buck’ in 2008 (its net asset value fell to $0.97), regulators and accounting bodies have busied themselves dreaming up ever more complex rules and revaluations to dispel the illusion that liquidity funds as are good as cash. This is certainly a good thing from the perspective of financial transparency, but it has brought more work and cost to treasurers using these instruments. It has also increased the costs of running liquidity funds themselves, thereby reducing yields.

Narrow bank deposits offer all the benefits touted by liquidity funds, with both lower costs and higher security and liquidity.

Cash management

Many of the benefits of narrow banking as a store of value in terms of security, liquidity and yield apply to cash management as well. To the extent that balance management (cash pooling in its various forms) result in credit balances, the benefits are the same. (A narrow bank will not be able to offer overdraft on balance management products because it is precluded from lending.)

From a payments perspective, the benefits of security and liquidity are obvious. The lower regulatory and organisational overheads of narrow banking, together with the absence of legacy technology stacks, would enable it to be fully cost competitive with full banks.

From a network perspective, assuming that narrow banks will be start-ups, they may not have the global reach of some of the largest full banks. On the other hand, we seem to be seeing a radical withdrawal from global banking by most large full banks, as they decide to focus on core and profitable markets. Further, the evidence from the success of retail FX and payment banks such as shows that they can be very competitive in both cost and reach by availing the services of their partner payment service providers.


It may take a while to become common, but it is clear that simpler banking – and especially narrow banking – can offer many benefits for treasurers and their employers.

David Blair, Managing Director

David Blair, Managing Director, AcarateAcarate logo

Twenty-five years of management and treasury experience in global companies. David Blair has extensive experience managing global and diverse treasury teams, as well as playing a leading role in eCommerce standard development and in professional associations. He has counselled corporations and banks as well as governments. He trains treasury teams around the world and serves as a preferred tutor to the EuroFinance treasury and risk management training curriculum.

Clients located all over the world rely on the advice and expertise of Acarate to help improve corporate treasury performance. Acarate offers consultancy on all aspects of treasury from policy and practice to cash, risk and liquidity, and technology management. The company also provides leadership and team coaching as well as treasury training to make your organisation stronger and better performance oriented. |

The views and opinions expressed in this article are those of the authors

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