Fed Rejects Bank for Being Too Safe

Narrow banks.

The basic business of banks is to take deposits and make loans. The deposits have to be “risk-free”: A deposit in a bank account ought to be just “money”; depositors shouldn’t have to worry about it. The loans have to be risky: Lending money to people to start businesses or buy houses necessarily comes with the risk that they won’t pay you back. This is the magic, and the problem, of banking — that banks take risky loans and turn them into risk-free deposits — and there are lots of fraught imperfect ways to make it work. The banks diversify their loans and take collateral and monitor their borrowers; they have capital buffers to make sure they’ll still have money even if some loans go bad. Regulators monitor banks’ lending and liquidity and capital; central banks and deposit insurers backstop the banks. It mostly works most of the time, but it is controversial and conceptually imperfect. No private business can really turn risky loans into entirely risk-free deposits. The government (or the central bank) mostly can, at least if it prints its own currency, but using government resources to backstop lucrative private businesses has its own issues.