3 ms·

Why the Fed Denied the Narrow Bank

7 points by runeks 8y ago

andrewla 8y ago
The link appears to be down; google cache is here [1]. Bloomberg's coverage is here [2]. The idea of the Narrow Bank is to do no banking; just deposit all deposits into its reserve account at the Federal Reserve, where it would draw 1.95% interest. They were denied an account at the Fed, and have sued [3] to get their account. Although the Narrow Bank is set up to allow only institutional clients, the case has apparently been drawing attention because if such a bank offered retail banking services, then it could be very exciting, since they are engaged only in risk-free activities and can still deliver a higher return on investment than the existing retail and commercial banks. [1] https://webcache.googleusercontent.com/search?q=cache:uJXGESCR4MAJ:https://monetary-metals.com/why-the-fed-denied-the-narrow-bank-report-9-sep-2018/+&cd=1&hl=en&ct=clnk&gl=us https://webcache.googleusercontent.com/search?q=cache:uJXGES... [2] https://www.bloomberg.com/view/articles/2018-09-06/fed-rejects-bank-for-being-too-safe https://www.bloomberg.com/view/articles/2018-09-06/fed-rejec... [3] https://faculty.chicagobooth.edu/john.cochrane/research/papers/Complaint%20(filed).pdf https://faculty.chicagobooth.edu/john.cochrane/research/pape...
lolc 8y ago
This article starts easy enough. Then it suddenly starts using terms and concepts I'm not familiar with. And then this: > A free market has a stable interest rate, and there’s no need to hedge. Even if I don't understand what's written in that paragraph: What could possibly be the meaning of this sentence? I cannot imagine a context where it would be sensible to say something like this.
- andrewla 8y ago
  I think what the article is trying to say is not that the free market has an unchanging interest rate, but rather that it is determined by market forces. Anyone that wants to try to change the interest rate has to take risk to do so. The Fed, though, can change the interest rate in a risk-free fashion. So organizations that depend on the interest rate always have to hedge against potential changes in the interest rate not driven by market forces. I think the biggest issue that this article is chasing is that the interest rates so given are preferential by nature -- only certain eligible banks can claim the interest rate, and they are not being permitted to pass that on to their customers in an unadulterated form, so the market has to find ways to flow around this, to allow things like betting on derivatives related to a bank's performance in order to try to gain exposure to the underlying Fed-offered interest rate.

7 points by runeks 8y ago

The link appears to be down; google cache is here [1]. Bloomberg's coverage is here [2]. The idea of the Narrow Bank is to do no banking; just deposit all deposits into its reserve account at the Federal Reserve, where it would draw 1.95% interest. They were denied an account at the Fed, and have sued [3] to get their account. Although the Narrow Bank is set up to allow only institutional clients, the case has apparently been drawing attention because if such a bank offered retail banking services, then it could be very exciting, since they are engaged only in risk-free activities and can still deliver a higher return on investment than the existing retail and commercial banks. [1] https://webcache.googleusercontent.com/search?q=cache:uJXGESCR4MAJ:https://monetary-metals.com/why-the-fed-denied-the-narrow-bank-report-9-sep-2018/+&cd=1&hl=en&ct=clnk&gl=us https://webcache.googleusercontent.com/search?q=cache:uJXGES... [2] https://www.bloomberg.com/view/articles/2018-09-06/fed-rejects-bank-for-being-too-safe https://www.bloomberg.com/view/articles/2018-09-06/fed-rejec... [3] https://faculty.chicagobooth.edu/john.cochrane/research/papers/Complaint%20(filed).pdf https://faculty.chicagobooth.edu/john.cochrane/research/pape...

lolc 8y ago

This article starts easy enough. Then it suddenly starts using terms and concepts I'm not familiar with. And then this: > A free market has a stable interest rate, and there’s no need to hedge. Even if I don't understand what's written in that paragraph: What could possibly be the meaning of this sentence? I cannot imagine a context where it would be sensible to say something like this.

andrewla 8y ago
I think what the article is trying to say is not that the free market has an unchanging interest rate, but rather that it is determined by market forces. Anyone that wants to try to change the interest rate has to take risk to do so. The Fed, though, can change the interest rate in a risk-free fashion. So organizations that depend on the interest rate always have to hedge against potential changes in the interest rate not driven by market forces. I think the biggest issue that this article is chasing is that the interest rates so given are preferential by nature -- only certain eligible banks can claim the interest rate, and they are not being permitted to pass that on to their customers in an unadulterated form, so the market has to find ways to flow around this, to allow things like betting on derivatives related to a bank's performance in order to try to gain exposure to the underlying Fed-offered interest rate.