Assessment of Narrow Banking as a Viable Reform for Financial Stability in the Post-Crisis Era

Details

Supervisors

Vrins, Frédéric

Faculty

Louvain School of Management

Degree label

Master [120] : ingénieur de gestion, à finalité spécialisée

Abstract

enIn the general financial system that governs economies around the world, banks are taking an active role with tremendous responsibilities. Being in charge of people’s capital makes them the foundation of the financial and economical sphere worldwide. Unfortunately, we have observed lately rapid changes in the geopolitical sphere resulting in many wars and changes in needs and beliefs. Geopolitical uncertainty and widespread distrust in financial institutions - particularly after the 2008 Great Financial Crisis - have called for new reforms and regulations. As a solution, multiple theories regarding the financial system have been discussed and this thesis examines the narrow banking proposal as a variant of full reserve banking. Regarding the methodology, we first explored the timeline leading to the emergence of such reforms, as well as the various proposals under the full reserve banking theory. We compared the narrow banking proposal to the current fractional reserve system and highlighted the various benefits and critics from economists and scholars. Even though the subject is deeply theoretical by nature, we investigated also more practical application through simulation and real-world examples. As a result, the thesis provides necessary theories to fully understand the narrow banking proposal and what it entails. The analysis concludes that narrow banking is not the solution to financial stability due to its too restricted scope of action and inability to cope with the pressure from banks and other financial lobbies. Additionally, the proposal would incur considerable costs and originate massive deflationary pressure with disastrous effect on credit allocation to the population, resulting on a poor impact on economic growth.