Are you familiar with Narrow Banking? If not, grab a coffee, sit down with me and get ready to leave the room more pissed off with the Fed that you were before coming in.
You are most probably familiar with the Fed's interest rate. When the rate is positive (which used to be the normal thing until recently), banks can safely store their own cash at the Fed and earn a return determined by the interest rate.
But you can't do that. You can't simply deposit your money at the Fed and get a nice return with the most secure entity in the US. Only selected banks can do it. As George Carlin said, "It's a big club, and you ain't in it".
The issue is infuriating, right? Why the heck can they do it but we, simple mortals, can't? This sparked the idea of The Narrow Bank, and it's service proposal, which was dubbed Narrow Banking. The idea of this bank was very simple: to provide you access to the same deal banks are getting. You would deposit your money in the Narrow Bank. They, in turn, would deposit it at the Fed to earn the interest rate. That would be paid back to you, minus a tiny service fee. End of story.
It sounds like a great deal, doesn't it? From a safety point of view, it's unbeatable. The Fed is the lender of last resort, so there is nothing safer than having your money there. It is quite a difference from depositing your money in a regular bank that gets involved in all sort of complex and risky financial operations to earn more. Plus, you earn interests. There are strong arguments to support the idea that a bank going the narrow way would have plenty of customers and business going on.
The Narrow Bank asked to open an account at the Fed to start operating. The Fed rejected their application. The reason? They fear it would take away funds from regular banks. The Fed is literally forcing you to take risk by working with regular banks and preventing you from accessing the safe accounts it does offer to them. Remember: it's a big club, and you ain't in it.
I'll leave some links here for you to read and get more pissed off.
https://www.tnbusa.com/
https://www.bloomberg.com/opinion/articles/2019-03-08/the-fed-versus-the-narrow-bank
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20190306a.htm
https://en.wikipedia.org/wiki/Full-reserve_banking
https://www.econlib.org/why-does-the-fed-oppose-narrow-banking/
https://www.chicagobooth.edu/review/safest-bank-fed-wont-sanction
> It is quite a difference from depositing your money in a regular bank that gets involved in all sort of complex and risky financial operations to earn more.
It isn't different at all. That's what FDIC is for.
He should've tried saying something about checking account fees.
Yup. The point of the Fed is to ensure consumers can stick their money in banks without being experts in the banks' financial position themselves
From the point of view of the Fed, it is different though; the reason it offers banks special privileges like banking licences, deposit window lending access and [only recently, not uncontroversially] interest on reserves is because they perform complex and risky operations like lending businesses and homebuyers money the economy needs. If they didn't do this, the Fed wouldn't have come into existence, never mind having agreed to pay interest on reserves banks hold so it could maintain a positive interest rate after flooding the system with reserves with QE.
So there isn't an obvious imperative for the Fed to extend privileges it designed for lending institutions to an institution designed with the explicit intention of not performing that function, and simply earning a risk free margin on interest from the Fed. It's not too different to the situation where its difficult to register for charity tax breaks if the purpose of your organisation is in fact, not charitable.
> It's not too different to the situation where its difficult to register for charity tax breaks if the purpose of your organisation is in fact, not charitable.
Not really in the US. Just say you're a Church. Especially with the current US Supreme Court.
This is correct. The IRS has a list at its web site[0] of all the charities where you can get a tax deduction for making a donation -- except churches, which they do not list. Church charities are given much less scrutiny before allowing deductions.
The law also makes it extra hard for the IRS to audit the qualifications of churches to be treated as exempt charities for tax purposes.[1]
They won't support it because in a potential financial crisis/recession it would cause a bank run away from regular accounts to the fed backed accounts and it probably bankrupts half the financial system.
More importantly, it's safer than US Treasury bonds, so not only are the banks potentially all hosed, so is the US government because people sell bonds and park their money at the fed causing interest rates to spike at precisely the time the government may need to issue debt to fix things.
In other words, it's pretty much disastrous for everyone.
Thanks for posting that. The people who composed it and are "pissed off" if true are working from a state of knowledge that doesn't factor in much about distributed systems, or risk, or scale, much less banking. I imagine in reality that is not the case but from an argumentation perspective, an appeal to populism is evidence of being a crank or worse. There are definitely reasons in the context of CBDCs to consider retail access but being "pissed off" about the state of safety in FDIC-insured accounts or other safe assets is definitely not one of them.
Basically it would take deposits and park them at the Fed, and do nothing else. A non-lending bank. Or a passthrough for a feature of the current financial system that doesn't currently exist, but could: direct Fed deposit by the public. Theoretically that would be safer than a bank and could even be more convenient: circumvent the whole inconvenient mess that is payments in the US and just move numbers from one Fed DB entry to another.
One of the objectives that central banks try to achieve is to ensure banks lend out money (within risk limits). Capitalist economies depend on it to thrive; not in a Ponzi-like meaning, but rather to ensure money isn't hoarded, but rather is put to work (loaned money is used to drive business forward).
When this drops and central banks want to increase lending, for example, they drop the interest rate banks earn from just holding assets with the CB, encouraging more commercial lending (at higher risk but also higher interest).
Diverting all these deposits away from lending banks and into Fed account totally undermines it. Worse still, as other comments say this is more likely in a crisis, exacerbating it (eg maybe in plain sailing customers seek out banks with better savings rates but in a pinch will redeem ASAP).
CBDC is a bit if a half baked idea AFAICT, but it would replace cash, not all banks. Someone would still need to lend the digital cash.
Primary dangers are that an account directly at the Fed is safer than literally anything else. It's safer than US Treasury Bonds or any other type of bank account. So in a financial crisis similar to 2008 where you're uncertain of institutions financial state the safest course of action is to withdraw/sell everything and move it to the Fed.
But if you sell US Treasury Bonds you're effectively spiking interest rates on the cost of the government to borrow, which is exactly what you don't want to do during a recession/financial crisis as the government maybe the only party who can fix whatever is going on and they may need to borrow heavily to do it (as in 2008).
So you make a bad situation potentially much worse.
As for CBDC's, I don't know the specifics of how they might implement them, but I have to assume they will want to avoid the above scenario, although granted given a crypto currency would have the attributes of physical cash but the convenience of being trivial to store and use I don't know how you avoid that. Unless CDBC's can only be held in authorised institutions accounts (banks) and not effectively in cash form which is something I could potentially see them doing.
> But if you sell US Treasury Bonds you're effectively spiking interest rates on the cost of the government to borrow
Simple solution: given all the money is now parked at the Fed, have the Fed buy treasuries.
The whole operation is also susceptible to the interest rate market. So if the Fed doesn't want all this money it can charge for the stability service by setting the rate negative.
There's something to be said for the idea that the Fed provides an important global service called "stability", and if people want to benefit from this they should be allowed to buy in directly and pay for it directly. I've even wondered if this would be a great way to clobber the crypto stablecoin market by providing US stabledollar services to overseas non US nationals, but I suspect for other policy reasons they really don't want to do that.
It would be the opposite of stability though. While I gave the example of US Treasuries as a worst case scenario in reality before we get to them half the financial system would've been drained to the Fed. People would pull their money out of regular bank accounts and stick it in the Fed even at negative interest rates because a predictable percentage (probably small) loss is better than uncertainty that your bank might fail.
That is the complete opposite of stability, it's a worse kind of chaos than what would happen now.
There's a myriad of complicated and dangerous side effects from this for a benefit that frankly isn't useful for most people (due to FDIC insurance). So the only people it makes sense for are those relatively rich people who ought to be able to diversify their savings/investments to protect themselves.
What’s mind blowing is Banks could easily move deposit entries from one ledger to another using traceable, signed, encrypted, reproducible, auditable, public ledgers… instead of a central authority….. ah crap now I’m advocating for block chain.
How do banks make money these days? In theory a bank is supposed to make money by the difference they charge in loan interest and the interest they pay to customers, minus their overhead.
It just seems like if they’re charging 8%-12% on a 3-4 year auto loan, they’d be Paying more than .5% to customers.
It's the same model BUT they don't get anywhere near enough money from deposits to cover loans. So they bundle them up turn it into a "bond" and sell it to various clients (pension funds, high net worth individuals, hedge funds etc).
That's why they're not willing to pay more than 0.5% to depositors: You can do one deal to fund 100mil in lending with a hedge fund for 3%, or you can offer 3% to depositors, then spend another 3% employing staff and opening branches for those accounts, and when there is a downturn they all withdraw their cash and your bank fails.
That, and for (say) auto loans, you need to withhold a chunk of money to cover defaults.
23 comments
[ 4.1 ms ] story [ 65.6 ms ] threadIt isn't different at all. That's what FDIC is for.
He should've tried saying something about checking account fees.
From the point of view of the Fed, it is different though; the reason it offers banks special privileges like banking licences, deposit window lending access and [only recently, not uncontroversially] interest on reserves is because they perform complex and risky operations like lending businesses and homebuyers money the economy needs. If they didn't do this, the Fed wouldn't have come into existence, never mind having agreed to pay interest on reserves banks hold so it could maintain a positive interest rate after flooding the system with reserves with QE.
So there isn't an obvious imperative for the Fed to extend privileges it designed for lending institutions to an institution designed with the explicit intention of not performing that function, and simply earning a risk free margin on interest from the Fed. It's not too different to the situation where its difficult to register for charity tax breaks if the purpose of your organisation is in fact, not charitable.
Not really in the US. Just say you're a Church. Especially with the current US Supreme Court.
The law also makes it extra hard for the IRS to audit the qualifications of churches to be treated as exempt charities for tax purposes.[1]
[0]https://www.irs.gov/charities-non-profits/contributors/other...
[1]https://www.irs.gov/charities-non-profits/churches-religious...
More importantly, it's safer than US Treasury bonds, so not only are the banks potentially all hosed, so is the US government because people sell bonds and park their money at the fed causing interest rates to spike at precisely the time the government may need to issue debt to fix things.
In other words, it's pretty much disastrous for everyone.
Basically it would take deposits and park them at the Fed, and do nothing else. A non-lending bank. Or a passthrough for a feature of the current financial system that doesn't currently exist, but could: direct Fed deposit by the public. Theoretically that would be safer than a bank and could even be more convenient: circumvent the whole inconvenient mess that is payments in the US and just move numbers from one Fed DB entry to another.
Currently this bank is not FDIC insured.
Isn't this what is achieved by CBDC (central bank digital currencies). Wouldn't they have the same repercussions?
When this drops and central banks want to increase lending, for example, they drop the interest rate banks earn from just holding assets with the CB, encouraging more commercial lending (at higher risk but also higher interest).
Diverting all these deposits away from lending banks and into Fed account totally undermines it. Worse still, as other comments say this is more likely in a crisis, exacerbating it (eg maybe in plain sailing customers seek out banks with better savings rates but in a pinch will redeem ASAP).
CBDC is a bit if a half baked idea AFAICT, but it would replace cash, not all banks. Someone would still need to lend the digital cash.
But if you sell US Treasury Bonds you're effectively spiking interest rates on the cost of the government to borrow, which is exactly what you don't want to do during a recession/financial crisis as the government maybe the only party who can fix whatever is going on and they may need to borrow heavily to do it (as in 2008).
So you make a bad situation potentially much worse.
As for CBDC's, I don't know the specifics of how they might implement them, but I have to assume they will want to avoid the above scenario, although granted given a crypto currency would have the attributes of physical cash but the convenience of being trivial to store and use I don't know how you avoid that. Unless CDBC's can only be held in authorised institutions accounts (banks) and not effectively in cash form which is something I could potentially see them doing.
Simple solution: given all the money is now parked at the Fed, have the Fed buy treasuries.
The whole operation is also susceptible to the interest rate market. So if the Fed doesn't want all this money it can charge for the stability service by setting the rate negative.
There's something to be said for the idea that the Fed provides an important global service called "stability", and if people want to benefit from this they should be allowed to buy in directly and pay for it directly. I've even wondered if this would be a great way to clobber the crypto stablecoin market by providing US stabledollar services to overseas non US nationals, but I suspect for other policy reasons they really don't want to do that.
That is the complete opposite of stability, it's a worse kind of chaos than what would happen now.
There's a myriad of complicated and dangerous side effects from this for a benefit that frankly isn't useful for most people (due to FDIC insurance). So the only people it makes sense for are those relatively rich people who ought to be able to diversify their savings/investments to protect themselves.
So the people who would need to make use of this are those with so much money that they cannot insure all of it across all the banks available.
In other words, no, this does not effect "ordinary people" at all, it effects rich people.
The ideas are "blockchain adjacent" but without the waste.
It just seems like if they’re charging 8%-12% on a 3-4 year auto loan, they’d be Paying more than .5% to customers.
What am I not understanding?
That's why they're not willing to pay more than 0.5% to depositors: You can do one deal to fund 100mil in lending with a hedge fund for 3%, or you can offer 3% to depositors, then spend another 3% employing staff and opening branches for those accounts, and when there is a downturn they all withdraw their cash and your bank fails.
That, and for (say) auto loans, you need to withhold a chunk of money to cover defaults.