TNBL: The Narrow Bank, or how you have no right to have safe deposits
tnbusa.com
tnbusa.com
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.
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-sanctionIt 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.
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.