Crypto Might Get Some Banks

A theme that I have written about a lot around here is that US banking seems to be getting narrower. Traditionally, banks are in the business of (1) taking deposits and (2) making loans, and that is a famously risky combination: If all the depositors want their money back, the bank doesn’t have it, and there can be a destructive bank run. There are various ways to mitigate this problem — liquidity regulation, deposit insurance, the central bank as a lender of last resort — but it keeps popping up.

There is one theoretical way to get rid of the problem entirely: You could separate the business of taking deposits from the business of making loans. Some companies — call them “narrow banks” — could be in the business of taking deposits and just holding onto them, in literal piles of cash or more plausibly in the form of electronic reserves at the Federal Reserve. Other companies — call them “loan companies” — could be in the business of making loans, but not using deposits as funding. Those companies could raise funds from investors who knowingly take the risk of making loans and lock up their money for the long term. Deposits would be safe, loan funds would not be subject to runs, and the central risk would be removed from banking.