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The Economist September 22nd 2018 Finance and economics 69
TEN years on from the financial crisis,
the structure of American banking has
not changed. At its core are government-
guaranteed, and therefore cheap, deposits
that banks put to work, primarily through
lending. Deposits have become more im-
portant for bank funding in recent years;
governments have become increasingly
fussy about howthemoney is lent out. The
basic set-up is so entrenched thatmany be-
lieve there is no alternative.
A startup called TNB, short for The Nar-
row Bank, is questioning that assumption,
and causing a stir as a result. OnAugust 31st
TNB filed a complaint in federal court
against the NewYorkFed, which, it alleges,
is breaking the lawby refusing to grant it ac-
cess to the central bank’s payment system.
The Fed has made no comment, but in re-
sponse to growing pressure, it has ac-
knowledged the complaint.
The case throws light on an unusual
business model. Led by a former head of
research at the NewYork Fed, TNB is based
on the idea of a narrow bank, which was
first suggested by professors at the Univer-
sity of Chicago as a response to the bank-
ing crisis of the 1930s. The proponents of
the “Chicago plan” argued that deposits
and lending need not be linked. A bank
could have a narrow mandate, restricting
itself tomerely receiving deposits.
The court filing suggests that TNB
planned to do just that, taking deposits
from financial institutions (though not
fromconsumers) and redepositing themat
the Fed in order to take advantage of the
Fed’s interest rate on reserves, which is
1.95%. There would be no need for
branches or credit analysts. Compliance
costs would be minimal: as the bank
would not make loans, regulators would
need only an audit to show the bank’s
funds on account at the Fed covered its cli-
ents’ deposits. Tokeep costs lower still, TNB
intends to avoid having deposit insurance,
which can cost up to 0.4% of assets. As the
money is invested with the central bank, it
is already guaranteed by the government.
Most American banks paymeasly rates
of interest ofunder0.1%, according toBank-
a data provider. With its austere
model, TNB could plausibly provide a
competitive rate on deposits, while keep-
ing some of the spread between the Fed
rate and the interest it pays to customers.
The operating model is not without risks.
The Fed could cease paying interest to
banks, for example, a demand that both
America’s political parties have made at
times. But TNB, or a similarlyminded insti-
tution, could tweak the model in response
and invest its deposits in government secu-
rities instead.
The Fed’s silence has drawn criticism.
TNB has received a temporary banking
charter fromConnecticut, so the state regu-
lator clearly deems it to be legal. The cen-
tral bank may worry that narrow banks,
which lend to neither companies nor indi-
viduals, could hamper the effectiveness of
monetary policy. Their business model
may also risk unsettling incumbent banks,
which could have large economic conse-
quences. TNB’s suit says that the Fed’s ac-
tions “have the effect of discriminating
against small, innovative companies” and
“privileging established, too-big-to-fail in-
stitutions”. The Fed may eventually be
forced to explainwhy that is a virtue. 7
Narrow banking
A hornets’ nest
NEW YORK
The Fed stalls the creation of a bank
with a novel businessmodel
Poverty estimates
A thin gruel
HANS ROSLING, a Swedish academic
who died in 2017, became famous for
telling people that theworldwas faring
better than they believed. One of his
favourite exampleswas the rapid decline
in extreme poverty. Sadly, just as Ros-
ling’s elegant charts and YouTube talks
drilled that story into people’sminds, the
facts began to change.
On September19th theWorld Bank
released estimates for extreme poverty in
2015, defined as living on less than $1.90 a
day at 2011purchasing-power parity. The
good, Roslingish news is that poverty
continued to diminish (see chart). In 2015
the extreme poor numbered 736mpeo-
ple, or10% of theworld. The Bank’s best
guess for 2018 is 8.6%.
The bad news is that poverty is be-
coming harder to tackle. Over the past
fewdecades, rapid economic growth and
the expansion ofwelfare in Asia have
borne down on extremewant there. That
leaves sub-Saharan Africans as a growing
majority of paupers. African poverty is
especially intractable because ofweak
economies, high birth rates and the fact
that many poor Africans are not even
close to the $1.90 line. Between 2013 and
2015, theWorld Bank thinks, the poor
population of sub-Saharan Africa grew
from405m to 413m. As a result, the global
poverty rate is going down about half as
quickly as before.
The latest estimates contain another
nasty surprise. In theMiddle East and
north Africa the number of deeply im-
poverished people appears to have al-
most doubled in two years, from10m to
19m. Twowar-torn countries, Syria and
Yemen, explain this growth. It is hard to
be certain, given the difficulty of col-
lecting data. But theMiddle Eastern jump
hints at a broad change. Increasingly,
extreme poverty is found in chaotic,
ill-governed places. Figures on hunger
released earlier thismonth suggest that it
is growing in Venezuela.
There is a broader lesson in that, says
Laurence Chandy, director of data and
research at UNICEF, the UN Children’s
Fund. Theworld has been preoccupied
with the taskof pulling people out of
extreme poverty. But therewas always
another challenge, which is becoming
more pressing. Howcan entire pop-
ulations be prevented from falling into it?
Extreme poverty is changing, making it harder towipe out
Always with you
Source: World Bank *Purchasing-power parity
Number of people living in extreme poverty, bn
Less than $1.90 a day at 2011 PPP*
FORECAST
0
0.5
1.0
1.5
2.0
1990 2000 10 20 30
Sub-Saharan Africa
East Asia
& Pacific
South
Asia
Rest of world