Farewell to Fractional Banking
When I wrote last week on the OCC’s shift to “activity” from “entity” regulation, the memo and the subsequent op-ed in the American Banker elicited a lot of questions about just what I meant by structural transformation.  I said last week that intermediation, not arbitrage, stokes growth.  Many of you agreed with that, but still more ask what this means in practice.  The answer, as I’ll explain now, is that disassembled banks are only updates of old-school “narrow” banks that house deposits in depositor-selected assets, not those a bank selects via loans or investments in the macroeconomy.  These narrow charters usually rely on 100 percent, sterile reserves to back the funds entrusted to them, a model harkening back to Renaissance goldsmiths once deemed doomed by the development of “fractional banking” in the 17th century and the economic growth it powered – structural transformation and then some.

m091820.pdf