The problem with narrow banks is that it would expose the fact that the Fed raising interest rates is causing significant instability. I mean, if banks offer 5

The problem with narrow banks is that it would expose the fact that the Fed raising interest rates is causing significant instability. I mean, if banks offer 5% interest and the fed raises interest to 4%, then there is no problem but if the Fed goes to 6%, it becomes a problem because people switch to the narrow bank. In other words, the banks in the real world cannot compete with banks that take government subsidies, so the subsidy must be carefully chosen instead of being raised arbitrarily.