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Financial overhaul could create financial utilities

Matthew McCormick, a portfolio manager at Bahl & Gaynor Inc., talks about the prospects for legislation to overhaul U.S. financial regulation and the implications for financial stocks.

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Let’s move away from the shadow banking system and go to a new place > > >

Narrow banking is a proposed type of bank called a narrow bank also called a safe bank. Ultimately, if adopted widely, this could lead to an entirely new banking system. Narrow banks can, by risk reduction measures designed into the narrow bank, significantly reduce potential bank runs and the need for a deposit insurance provided by the central bank. It is sometimes suggested as an improvement upon fractional reserve banking.

Narrow banking would restrict banks to holding liquid and safe government bonds. Loans would instead be made by other financial intermediaries. That is, the deposit taking and payment activities have been separated from financial intermediation activities. Two different types of banks (financial companies) are needed, one for each activity.

More at Riski on narrow banks

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“The Wall Street banks are the new American oligarchy– a group that gains political power because of its economic power, and then uses that political power for its own benefit. Runaway profits and bonuses in the financial sector were transmuted into political power through campaign contributions and the attraction of the revolving door. But those profits and bonuses also bolstered the credibility and influence of Wall Street; in an era of free market capitalism triumphant, an industry that was making so much money had to be good, and people who were making so much money had to know what they were talking about. Money and ideology were mutually reinforcing….

13 Bankers… Johnson and Kwak