Limited Purpose Banking
All limited liability financial companies, including banks, are turned into pass-through mutual funds, which do not borrow to invest in risky assets but, allows the public to directly choose what risks it wishes to bear by purchasing more or less risky mutual funds. Current bank deposits will, therefore, become a claim on an entity which holds a reserve at the central bank.
Limited purpose banking was pioneered by Lawrence J Kotlikoff and is sometimes referred to as ‘Equity-Financed Mutual Fund Banking’.
Chamley, C., Kotlikoff, L.J. and Polemarchakis, H., 2012. Limited-Purpose Banking–Moving from” Trust Me” to” Show Me” Banking. American Economic Review, 102(3), pp.113-19.
Kotlikoff, L.J., 2010. Jimmy Stewart is dead: Ending the world’s ongoing financial plague with limited purpose banking. John Wiley & Sons.