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Notes: DYNAMIC Updated MCQ: Which of the following is/are correct statements regarding Narrow Banking? 1. In Narrow Banking, banks restrict their activities to accepting deposits and investing primarily in safe, liquid assets like government securities, while avoiding risky activities such as proprietary trading and complex derivatives. 2. In Narrow Banking, there is rarely Asset-Liability Mismatch because liabilities are matched to the characteristics of assets in terms of risk and maturity. Options: - A. Only 1 is correct - B. Only 2 is correct - C. Both 1 & 2 are correct - D. Neither 1 nor 2 is correct Correct Answer: C. Both 1 & 2 are correct Fact-Based Explanation: Statement 1 is correct. Narrow banking is a financial model in which banks restrict their activities to primarily accepting deposits and investing in secure, low-risk prime assets. Unlike traditional commercial banks that engage in risky asset investments, complex derivative trading, and leverage, narrow banks focus on stability and reduced risk exposure by holding safe, liquid assets like government securities and avoiding riskier activities such as proprietary trading. Statement 2 is also correct. Narrow banking means banking without liability transformation, where a narrow bank's liabilities match the characteristics of its assets. If a bank has long-term assets, it issues long-term liabilities; if it has risky assets, it issues risky liabilities. This matching prevents the inherent mismatch found in traditional banking, where institutions hold risky, long-term assets while issuing purportedly riskless, short-term liabilities. As a result, narrow banks would essentially be ""fail-safe"" institutions." "