Description
This is a presentation about Narrow Banking(NB) in detail. The advantages, disadvantages, causes etc are talked about in detail in the presentation.
Narrow Banking
Importance of Financial Services
? Money as a store of value
? Raise and sustain investment
? Stable banking
Impact of Banking Failure
? 8% chance of bank failure
? Average loss of 9% of GDP
? Increase in poverty ? Women and children suffer
Problem
? Gamble with depositor wealth
? Private incentive for banks
? Regulator- check on self-interest ? RBI isn’t very good at that
Stop!
? Intrusive Supervision
? Hammer into place
? Unsatisfactory results
Hammer
? Tight control and currency mismatches made strict
to promote financial development ? Financial Intermediary Development
Intrusive Supervision
? Close monitoring
? Formal frameworks imperfect
? Full comprehension of big banks difficult ? Supervision of supervisors
? Deutsche bank has 2000 entities
Moral Hazard
? Can we efficiently and effectively manage banks??
? NO, banks will not take initiative
? So we start from elsewhere…
? Restriction by allowing banks to invest depositor
wealth only in safe assets. ? This kind of banking is ‘NARROW BANKING’
So who invests in risky assets?
? Finance Houses and other financial intermediaries
? Raise capital from domestic and international
financial markets ? Shareholders monitoring so no intrusive supervision
Finance Houses
? Provide investment services
? No temptation to gamble with investor wealth
? Suppliers of capital with right incentives will monitor
institutions ? No need for supervision ? Reduced chance of loss in crisis
Evolution of NB in India
? Committee on Capital Account Convertibility
(Tarapore Committee as a solution to the problem of high NPAs ? The Committee proposed that incremental resources of these narrow banks should be restricted only to investments in govt. securities.
Concept
? Safe Bank
? Full reserve banking
? Reduce bank runs ? Need for deposit insurance by CB
? Fractional reserve banking improvement
? Liquid and safe government bonds ? Loans by financial intermediaries
Definition
A ‘Narrow Bank’ in its narrow sense, can be defined as the system of banking under which a bank places its funds in risk-free assets with maturity period matching its liability maturity profile, so that there is no problem relating to asset liability mismatch and the quality of assets remains intact without leading to emergence of sub-standard assets. Also known as full reserve banking — must be for lazy people, who don’t want to chase high yields and remain satisfied with counting the same bucks again and again. But in times of big downfalls, we suddenly find much larger audiences for NB.
Criteria
Additional criteria applied to safe banks include 1. No derivatives 2. No off balance sheet assets 3. High degree of institutional transparency (e.g. continuous real-time disclosure of financial records) 4. Capped executive salaries 5. Low risk jurisdictions
The status of NB in India
The concept is being implemented by the Indian banking system partly, as a large part of the deposits mobilised (i.e. more than 46%) by the banks, has been deployed in Govt. securities (against a prescription of 25% in the form of SLR) as it provides a safe avenue of investment but at a very low return. This keeps the level of NPAs (rather than advances) low and the requirement of CAR also low, as the risk weight allotted to such securities is only 2.5% compared to 100% in loan assets
Advantages
? Provide Liquidity
? No moral hazard problem
? Reduced chance that a financial crisis wipes out
depositor’s savings ? Ensures regular deployment of funds in low risk liquid assets. Expected to remove the problems of bank failures and the consequent systemic risks and loss to depositors.
Advantages
? NBs do not face any problem in meeting any
magnitude of withdrawals from depositors because all their money is invested in highly liquid securities that can be quickly converted into cash with a very low transaction cost. ? Also, do not face any problem of bad debts because all their investments are in government securities. So there can’t be a bank failure unless the government itself fails.
Fractional v/s Full Reserve
? NB is just like any other bank. They provide
services such as cash deposit and withdrawal, cheque payment and settlement, transfer of funds electronically and all other services that a depositor can use. ? However, narrow banks do not provide any loans to borrowers like you and me. This is the biggest difference between a narrow bank and a bank working on a fractional reserve system.
Critiques
? Narrow Banks are not practical
? Pool of assets too small to back narrow banks
? Inefficient ? NB earn less income on their investments than what
their peers in fractional reserve banking earn and consequently, their depositors have to be satisfied with low interest on deposits.
An illustration
? Take the example of postal savings schemes, the
closest example of narrow banking that we can find in our locality. Although post offices do not strictly fall under the definition of banks, they practically do the same things that any narrow bank does. They mobilize small savings which are ultimately utilized by our government. But in one respect postal savings are better off than a strict narrow bank. The rates of interest on their deposits are as competitive as any other commercial bank. However, their depositors may have to compromise on liquidity
Relevance today
? In the current financial and economic scenario, an
investor looks for quick returns; but the investor has also become wary of the surety and safety of his/her investments. It is clearly a trade-off between safety and returns. Narrow banking may come as a relief in this context. Also, many banks in India and abroad are rescued by the Government for economic and political reasons when on the verge of a collapse. ? In the long term, once the gloom over the economy has receded, the investor will look to maximise returns. In such a scenario, narrow banks may just become a liability on the over-burdened finances of the Government. It does narrow down to how effective the framework, reach and management of such banks are.
Thank You
doc_794533756.pptx
This is a presentation about Narrow Banking(NB) in detail. The advantages, disadvantages, causes etc are talked about in detail in the presentation.
Narrow Banking
Importance of Financial Services
? Money as a store of value
? Raise and sustain investment
? Stable banking
Impact of Banking Failure
? 8% chance of bank failure
? Average loss of 9% of GDP
? Increase in poverty ? Women and children suffer
Problem
? Gamble with depositor wealth
? Private incentive for banks
? Regulator- check on self-interest ? RBI isn’t very good at that
Stop!
? Intrusive Supervision
? Hammer into place
? Unsatisfactory results
Hammer
? Tight control and currency mismatches made strict
to promote financial development ? Financial Intermediary Development
Intrusive Supervision
? Close monitoring
? Formal frameworks imperfect
? Full comprehension of big banks difficult ? Supervision of supervisors
? Deutsche bank has 2000 entities
Moral Hazard
? Can we efficiently and effectively manage banks??
? NO, banks will not take initiative
? So we start from elsewhere…
? Restriction by allowing banks to invest depositor
wealth only in safe assets. ? This kind of banking is ‘NARROW BANKING’
So who invests in risky assets?
? Finance Houses and other financial intermediaries
? Raise capital from domestic and international
financial markets ? Shareholders monitoring so no intrusive supervision
Finance Houses
? Provide investment services
? No temptation to gamble with investor wealth
? Suppliers of capital with right incentives will monitor
institutions ? No need for supervision ? Reduced chance of loss in crisis
Evolution of NB in India
? Committee on Capital Account Convertibility
(Tarapore Committee as a solution to the problem of high NPAs ? The Committee proposed that incremental resources of these narrow banks should be restricted only to investments in govt. securities.
Concept
? Safe Bank
? Full reserve banking
? Reduce bank runs ? Need for deposit insurance by CB
? Fractional reserve banking improvement
? Liquid and safe government bonds ? Loans by financial intermediaries
Definition
A ‘Narrow Bank’ in its narrow sense, can be defined as the system of banking under which a bank places its funds in risk-free assets with maturity period matching its liability maturity profile, so that there is no problem relating to asset liability mismatch and the quality of assets remains intact without leading to emergence of sub-standard assets. Also known as full reserve banking — must be for lazy people, who don’t want to chase high yields and remain satisfied with counting the same bucks again and again. But in times of big downfalls, we suddenly find much larger audiences for NB.
Criteria
Additional criteria applied to safe banks include 1. No derivatives 2. No off balance sheet assets 3. High degree of institutional transparency (e.g. continuous real-time disclosure of financial records) 4. Capped executive salaries 5. Low risk jurisdictions
The status of NB in India
The concept is being implemented by the Indian banking system partly, as a large part of the deposits mobilised (i.e. more than 46%) by the banks, has been deployed in Govt. securities (against a prescription of 25% in the form of SLR) as it provides a safe avenue of investment but at a very low return. This keeps the level of NPAs (rather than advances) low and the requirement of CAR also low, as the risk weight allotted to such securities is only 2.5% compared to 100% in loan assets
Advantages
? Provide Liquidity
? No moral hazard problem
? Reduced chance that a financial crisis wipes out
depositor’s savings ? Ensures regular deployment of funds in low risk liquid assets. Expected to remove the problems of bank failures and the consequent systemic risks and loss to depositors.
Advantages
? NBs do not face any problem in meeting any
magnitude of withdrawals from depositors because all their money is invested in highly liquid securities that can be quickly converted into cash with a very low transaction cost. ? Also, do not face any problem of bad debts because all their investments are in government securities. So there can’t be a bank failure unless the government itself fails.
Fractional v/s Full Reserve
? NB is just like any other bank. They provide
services such as cash deposit and withdrawal, cheque payment and settlement, transfer of funds electronically and all other services that a depositor can use. ? However, narrow banks do not provide any loans to borrowers like you and me. This is the biggest difference between a narrow bank and a bank working on a fractional reserve system.
Critiques
? Narrow Banks are not practical
? Pool of assets too small to back narrow banks
? Inefficient ? NB earn less income on their investments than what
their peers in fractional reserve banking earn and consequently, their depositors have to be satisfied with low interest on deposits.
An illustration
? Take the example of postal savings schemes, the
closest example of narrow banking that we can find in our locality. Although post offices do not strictly fall under the definition of banks, they practically do the same things that any narrow bank does. They mobilize small savings which are ultimately utilized by our government. But in one respect postal savings are better off than a strict narrow bank. The rates of interest on their deposits are as competitive as any other commercial bank. However, their depositors may have to compromise on liquidity
Relevance today
? In the current financial and economic scenario, an
investor looks for quick returns; but the investor has also become wary of the surety and safety of his/her investments. It is clearly a trade-off between safety and returns. Narrow banking may come as a relief in this context. Also, many banks in India and abroad are rescued by the Government for economic and political reasons when on the verge of a collapse. ? In the long term, once the gloom over the economy has receded, the investor will look to maximise returns. In such a scenario, narrow banks may just become a liability on the over-burdened finances of the Government. It does narrow down to how effective the framework, reach and management of such banks are.
Thank You
doc_794533756.pptx