Revitalising Narrow Banking: Tenet’s Engineering-First Approach
Published on: Wednesday, 18 October, 2023
Traditional thinking holds that banks must make a tradeoff: between the primary goal of safeguarding client deposits on one hand, and shareholder pressures to earn profits by redeploying those assets to make loans and investments on the other. But thanks to Tenet’s engineering-first approach to banking, it is able to offer clients stability and safety while also providing them an innovative product that is fit for the modern era.
In fact, Tenet gives clients access to a form of so-called “narrow banking,” which focuses on protecting deposits by avoiding practices like lending, trading, and investing in volatile assets. Despite the benefit of extremely limited risk that narrow banking provides to clients, most banks do not offer it. Read on to see why not, and how Tenet is able to provide a better solution.
From the Great Depression to Modern Banking
The origins of narrow banking lie in a proposal, known as the “Chicago Plan,” from a group of economists at the University of Chicago during the tumultuous period following the 1929 market crash.1 This group argued that in addition to protecting depositors by not lending their assets, narrow banking would provide several other, society-wide benefits. These included eliminating bank runs, limiting economic volatility, and reducing public and private debt.2 Follow-on studies from reputable academic leaders supported these claims,3 but narrow banking was not adopted as other legislation and reforms restored public confidence in the financial system.4
Recently, interest in narrow banking has seen a resurgence, driven by several high-profile bank failures in early 2023, caused in large part by private capital-management decisions that had been made under prior monetary policy.5 But two key factors have held narrow banking at bay.
One is the reluctance that US banking regulation has shown towards it, such as when the Federal Reserve declined to issue a license to “The Narrow Bank,” arguing that narrow banking could undermine the effectiveness of US monetary policy.6 7 Tenet is not subject to this hurdle, however, because its regulator, the Cayman Islands Monetary Authority, has been very proactive to support the benefits of stability and security that Tenet offers. This allows Tenet to hold client deposits without being expected to lend as well; in other words, it allows Tenet to practice narrow banking.
Achieving Narrow Banking through Innovation
Tenet’s engineering-first approach enables it to overcome a second challenge to narrow banking—profitability. But Tenet sees another path, one grounded in the scalability and customisability of best-in-class technology that meets the needs of the world’s most innovative entrepreneurs, startups, investment funds, and institutions.
It is in this way — through continuous engineering, technology expertise, and a range of features including easy onboarding, API-powered integrations, and intuitive interfaces — that Tenet empowers our clients to capture their slice of the global innovation economy, while keeping their deposits safe and secure.
https://www.levyinstitute.org/publications/the-chicago-plan-and-new-deal-banking-reform ↩︎
Ibid ↩︎
https://www.levyinstitute.org/publications/the-chicago-plan-and-new-deal-banking-reform ↩︎
https://mitsloan.mit.edu/shared/ods/documents?PublicationDocumentID=9955 ↩︎
https://www.federalregister.gov/documents/2019/03/12/2019-04348/regulation-d-reserve-requirements-of-depository-institutions ↩︎
https://www.bloomberg.com/opinion/articles/2019-03-08/the-fed-versus-the-narrow-bank ↩︎
Authored by:
Brian Tang
Brian Tang is Tenet's Managing Director and a member of its Board of Directors. He is a CFA charterholder with experience managing multibillion-dollar balance sheets at several financial services institutions. He is also a co-founder of Code(Cayman), a nonprofit that provides tech-sector skills training for the Caymanian population.
