Q. Consider the following statements regarding Narrow Banking:

1. In Narrow Banking, banks primarily accept deposits and invest largely in safe, liquid assets such as government securities, while avoiding risky activities including proprietary trading and complex derivatives.
2. Asset-Liability Mismatch is rare in Narrow Banking because the liabilities are aligned with the risk and maturity characteristics of the assets.

Which of the above statements is / are correct?
Answer: Both 1 and 2
Notes: Statement 1 is correct because Narrow Banking limits banks to investing in liquid, safe assets, such as government securities, avoiding higher-risk strategies. Statement 2 is also correct since matching the maturity and risk of assets and liabilities reduces the possibility of asset-liability mismatches. Therefore, both statements correctly describe the essential features of Narrow Banking.