The John Vickers / John Kay mess up on narrow banking.

If you want narrow banking (aka full reserve banking) explained to you, don’t bother with John Kay’s paper entitled “Narrow Banking”.

First, the paper is about 20,000 words, most of it concerned with bank problems IN GENERAL: i.e. the paper is not concerned for the most part with narrow banking.

Second, the paper contains a huge blunder, as follows.

Kay starts by claiming, correctly, that narrow banking consists of banks investing depositors’ money only in ultra-safe assets. Indeed that’s entirely in line with of other advocates of narrow / full reserve banking, e.g. Positive Money, Milton Friedman, Laurence Kotlikoff, etc. As Kay puts it, “The model of narrow banking is one in which all retail deposits are secured on safe assets.”

And by “safe assets” what Positive Money, Friedman, Kotlikoff mean is GENUINELY SAFE ASSETS. That’s simply money lodged at the central bank, but possibly also short term government debt, as suggested by Friedman.

But later on, Kay claims (p.52): “Narrow banks might engage in consumer lending, lend on mortgage, and lend to businesses, but would not enjoy a monopoly of these functions.”

Well in that case, there’s precious little difference between Kay’s so called narrow banks and the sort of bog standard banks we currently have, which of course lend to mortgagors and businesses! Plus of course his latter point about mortgages etc contradicts his earlier point about narrow banks investing only in ultra-safe assets.

That mistake by Kay is the equivalent of building an airliner and forgetting to give it wings. It’s like designing a car and forgetting to give it an engine. It indicates that Kay is clueless on this issue.

The Vickers commission.

That probably helps explain why the sections of the Vickers report that dealt with narrow banking are nonsense, since the report (to judge by the few works cited in the relevant sections of the Vickers report: 3.20-3.23) relied heavily on Kay’s paper.