Traditionally, banks are in the business of (1) taking deposits and (2) making loans, and that is a famously risky combination: If all the depositors want their money back, the bank doesn’t have it, and there can be a destructive bank run. There are various ways to mitigate this problem — liquidity regulation, deposit insurance, the central bank as a lender of last resort — but it keeps popping up.

One purpose of a financial system is to ensure that we are, in general, in a high-investment dynamic rather than a low-investment stasis. This is a core problem that finance in general and banks in particular have evolved to solve. A banking system is a superposition of fraud and genius that interposes itself between investors and entrepreneurs.

"Banks take money from savers who don’t want to take risks, and use it to fund risky projects, a pro-social sleight of hand."

in 2018, an entity called TNB USA Inc. tried to open a narrow bank. It applied for an account at the Fed, where it would just park its depositors’ money. It wouldn’t make any loans or investments; all the money would just sit at the Fed, which pays interest on reserves. The Fed dragged its feet on opening an account for TNB, and explained its reasoning 2019, arguing that “narrowly focused depository institutions” like TNB, which “hold a very large proportion of their assets in the form of balances at Reserve Banks,” could “have the potential to complicate the implementation of monetary policy” and “disrupt financial intermediation in ways that are hard to anticipate.”

in 2018 and 2019, this struck me as largely correct: If everyone could have totally safe, Fed-backed, interest-paying deposits, surely there would be less demand for bank deposits, fewer loans and less financial intermediation.

So banking is getting narrower, though it is not yet narrow in any absolute sense. Private credit is still much smaller than the banking system, and private credit firms themselves often borrow from banks to increase their ability to make loans.

Also: STABLECOINS

A stablecoin is a crypto form of banking: You deposit dollars with a stablecoin issuer, it gives you back tokens entitling you to get your dollars back, and meanwhile it does whatever it wants with the dollars. In the unregulated early days of crypto, “whatever it wants” could be quite spicy indeed, but these days stablecoins are a big business and there is something of a norm of parking the deposits in very safe short-term dollar-denominated assets

the weirder story here is: If you are a crypto firm that wants a bank charter, do you have to do lending? If you are a stablecoin issuer whose entire business is (1) taking deposits and (2) parking those deposits in Treasury bills, do bank regulators want to give you a charter? Aren’t bank charters for banks that do financial intermediation?

This is a little funny because crypto is to some extent a reaction against traditional banking. Satoshi Nakamoto invented Bitcoin in part in disgust at the 2008 financial crisis. And cryptocurrencies are distinct from dollars in that a dollar fundamentally is a debt obligation of a bank, while a Bitcoin fundamentally isn’t; crypto is a form of non-debt money, a way to have money and payments and bank accounts without traditional banking.