Narrow banking as a safer alternative in the modern financial system : To what extent can narrow banking contribute to a safer and more resilient financial system, while preserving the essential functions of banking, and can it represent viable alternative to the current banking system?

Details

Supervisors

Vrins, Frédéric

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion, à finalité spécialisée

Abstract

enThe global financial crisis of 2008 renewed interest in alternative banking models capable of enhancing financial stability while protecting depositors from excessing risk-taking. Among these proposals, narrow banking has emerged as a potential alternative to the traditional fractional-reserve banking system by advocating a clear separation between payment functions and credit intermediation. This thesis examines the extent to which narrow banking can represent a viable alternative to the current banking system while contributing to a safer and more resilient financial architecture. Using a qualitative and analytical approach based on academic literature, regulatory developments and practical case studies, this research first explores the theoretical foundations of narrow banking and compares its principal institutional models. It then critically assesses the economic and regulatory challenges associated with its implementation, particularly regarding credit creation, financial intermediation, risk migration and commercial viability. Finally, this thesis examines the practical experience of alternative banking initiatives, with particular emphasis on the Belgian cooperative NewB, to evaluate the gap between theoretical proposals and institutional realities. The analysis demonstrates that narrow banking offers a convincing theoretical framework for improving deposit protection and reducing systemic risk. However, its implementation raises significant economic regulatory and institutional challenges. The findings suggest that, even though a complete transition towards a pure narrow banking system appears unlikely under current market conditions, several of its underlying principles continue to influence contemporary banking regulation and financial reforms. Rather than replacing the existing banking system, narrow banking is therefore best understood as a source of inspiration for the development of hybrid models that seek to reconcile financial stability with the essential functions of banking.