Stablecoins Make Banking Narrower

One theme around here is that banking is getting narrower. “Narrow banking” is the idea that you can separate (1) the business of taking bank deposits and facilitating payments from (2) the business of making loans. Traditional banks take deposits and make loans, which creates various problems; narrow banking would solve those problems, possibly at the cost of creating new ones. In narrow banking, deposits would be invested in the safest possible money (central bank reserves or short-term government bills), while loans would be made by funds with long-term equity financing.

In this move toward narrow banking, the lending role is done by private credit, as we often discuss. Private credit firms raise funds from investors with long-term lockups, and the investors consciously bear the risk of the loans.