Can money market mutual funds provide sufficient liquidity to replace deposit insurance?

Narrow banking is an arrangement in which deposit-taking and lending functions are separated and performed by different institutions. This separation is aimed at avoiding panics at uninsured banks, without moral hazard associated with deposit insurance. Money Market Mutual Funds (MMMFs) are promoted as replacements for bank deposits. For MMMFs to compete with banks, they must be able to withstand a monetary shock without losing shareholders in a flight to quality at government-insured institutions. VAR analysis indicates that MMMFs increase share issue subsequent to a monetary tightening. This bolsters the case that liquidity can be provided in a narrow banking framework.