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The Fed stalls the creation of a bank with a novel business model
- deleted 8y ago[deleted]
- seibelj 8y agoI'm sure this is an interesting article, but not only is my "article limit" reached, but I even can't login to read it.[0] Which is strange, given the hundreds of dollars per year I give The Economist to support them. If you want to stop people from stealing your articles, maybe give the paying readers access would be a start. [0] https://imgur.com/a/2uo4hnE https://imgur.com/a/2uo4hnE
- topmonk 8y agoI will set you free: http://archive.is/JYM3P http://archive.is/JYM3P
- seibelj 8y agoThat's fine and all, but I am happy to pay for top-notch journalism. But even me, the paying customer, is locked out.
- deleted 8y ago[deleted]
- UncleEntity 8y agoTLDR; Basically a bank which takes deposits from customers and then deposits the money at the Fed whereby earning a higher interest rate than the customer just depositing at a "regular" bank.
- AstralStorm 8y agoThe problem is, the Fed would have to drop rates costing all the banks and reducing liquidity and removing the reason it exists for in the first place, which is being lender of last resort. It offers preferential rates to banks as they are cooperative agents. It is not running at free market rates. If it were to open to free market, Fed would have to adjust the rates until it matches the reserve... Unlike most agents on the market, Fed is free to deny you.
- JumpCrisscross 8y ago> drop rates costing all the banks and reducing liquidity Lowering rates raises liquidity. It makes it easier to borrow and thus create money. > removing the reason it exists for in the first place, which is being lender of last resort The Federal Reserve has many functions, one of which is acting as a lender of last resort [2]. Acting as a central bank, i.e. managing the country's monetary policy, is its primary purpose. Addressing bank panics, facilitating transfers, and regulating financial institutions are secondary roles (albeit very important ones). In any case, reducing the interest paid on excess reserves does nothing to the Fed's standing. For most of the Fed's history, excess reserves were not paid special interest. It's a novel monetary policy instrument, and one still very much in its experimental phase. > It offers preferential rates to banks as they are cooperative agents The Fed pays 1.95% on reserves [2]. That is 5 bps less than what the Treasury pays to hold your money for one month [3]. It's 3 bps more than the average Fed funds rate, but within the 175-200 target range and less than the 2.1% 99th-percentile rate [4]. [1] https://www.federalreserve.gov/monetarypolicy/reqresbalances.htm https://www.federalreserve.gov/monetarypolicy/reqresbalances... [2] https://en.wikipedia.org/wiki/Federal_Reserve_System#Purpose https://en.wikipedia.org/wiki/Federal_Reserve_System#Purpose [3] https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield https://www.treasury.gov/resource-center/data-chart-center/i... [4] https://apps.newyorkfed.org/markets/autorates/fed%20funds https://apps.newyorkfed.org/markets/autorates/fed%20funds
- grzm 8y agoThis seems like a question for economist support. Have you reached out to them?
- HIPisTheAnswer 8y agoThere is only one banknote in the US, so there is only one bank. A lent deposit is no deposit. A dollar is 25 grains of gold.
- User23 8y agoThere is the usual misinformation in this article. Banks don’t loan out deposits. Originating loans expands their balance sheet. Deposits are useful to satisfy reserve requirements, when they exist[1], but if the loan is profitable the bank can always borrow the reserves at a lower rate on the interbank market. [1]https://www.federalreserve.gov/monetarypolicy/reservereq.htm https://www.federalreserve.gov/monetarypolicy/reservereq.htm
- BurningFrog 8y agoI know all those words, but I have no idea what you said.
- ddingus 8y agoBanks create money at the time someone gets a loan, and or risk is valued. Their reserve, deposits, determine the size of loan they can create.
- nazgulnarsil 8y agoI vividly remember trying to explain this to people during the financial crisis and people not being able to grasp it. I only learned it from being friends with an accountant who worked for a big bank.
- lucio 8y ago"Banks create money" (from thin air). That's the concept a lot of people struggle with.
- UncleEntity 8y agoBanks have always loaned out deposits, that's just what they do elsewise they'd be money warehousing operations and there'd be no fractional-reserve banking cartel.
- klodolph 8y ago
- deleted 8y ago[deleted]
- known 8y agohttps://archive.st/archive/2018/9/www.economist.com/w316/ https://archive.st/archive/2018/9/www.economist.com/w316/
- dannyw 8y agoIn a competitive market, if the Fed is paying out 1.95% to bank reserves, there is no reason why my savings account shouldn't pay me that figure minus a spread for expenses and a profit spread.
- ChristianBundy 8y agoI think that's what's happening, but the "profit spread" expands to fill any additional margin. It's not a competitive market and I see no reason to believe it ever will be.
- abenedic 8y agoThat is a point not oft appreciated. There is a price at which your bank can maximally use your funds. The should use them at that rate. So what is the rate, and what is the bank that allows that?
- shoo 8y agoi believe there is another proposal suggesting every individual should be able to deposit funds with the fed
- jayalpha 8y agoThis was possible in Germany. At one point this service was closed. I think I still have an account there with the Fed (with 50 Euros or something in it).
- rasz 8y agoDo you mean KdF beetle stamps? that particular investment didnt end well.
- wallace_f 8y agoImagine some dystopian future where you walk over homeless people on your way to work, hear about people without access to healthcare, and affordable housing crisis across the country... Meanwhile the government spends 5.6 trillion on in-perpetuity wars on people living in tents, or 4 trillion in helicopter'd money for Wall St; and somehow the people who are working constantly--who actually create the foundation of our economy to fund these wars and plutocrats--hardly ever complain about it because their limited free time to consume the news is overloaded with partisan politics, the latest Trump gaffe, etc? Way to be good serfs. No way you look at it, the Fed is not managed as an altruistic institution. At the very least, a very long time ago it should have been handed over to algorithmic monetary policy... but primarily just serving the role as a lender of last resort.
- spectrum1234 8y agoI don't understand why banks would give this bank their money. Shouldn't they be getting this same rate from the Fed? Something is left out.
- deleted 8y ago[deleted]
- dmurray 8y agoI think their target customers are not banks. The article says it would "take deposits from financial institutions" but this could mean insurance companies, pension funds, credit unions, securities exchanges, etc. Anyone who might have substantial cash reserves as an integral part of their business, but who does not actually have a banking license. Edit: from the Matt Levine piece linked further down the comments, the target customers are "money-market funds and foreign central banks".
- cryptonector 8y ago> The Narrow Bank would take deposits but not make loans That can't work, not if you scale it up across the industry. The Fed could not continue to pay interest even on overnight deposits without it directly turning into inflation. The economy could not function without loans. Alternatively the Fed would have to become the one (and only) lender for commercial (and muni, and...) purposes so that it could make the interest income on those with which to service deposits from these "narrow banks". A narrow bank is essentially free-loading, and politically untenable.
- yuhong 8y agoYea, I dislike the current debt-based economy for a reason.
- konschubert 8y agoMatt Levine writes about this in his newsletter: https://www.google.de/amp/s/www.bloomberg.com/amp/view/articles/2018-09-06/fed-rejects-bank-for-being-too-safe https://www.google.de/amp/s/www.bloomberg.com/amp/view/artic... BTW, it's a really great newsletter, always entertaining and has been teaching me a lot about the world of finance. His take on the Tesla scandal is hilarious.
- donavanm 8y agoStraying pretty far of off topic, but... in the trading house story why not just act as a market maker or counter party? Ignoring the fee structure and leverage the complaint appears to be that they simply took the deposits and did not actually make trades on behalf of the client. In a private exchange or trading house would it not be as effective for the house, or a “partner”, to selective meet the bid/ask based on the client account? Being generally ignorant Ill assume leaking counterparty information would also fall afoul of regulators?
- stephen_g 8y agoThis article has a surprising misunderstanding of the way banks work for a publication called “The Economist”. It is unintuitive, but banks do not and can not lend out deposits. Banks lever their capital (that is, paid up shares and retained profits) to lend, and that lending creates new deposits. Existing deposits and debt funding (money markets etc.) are useful as liquidity so they can settle interbank transfers, but they aren’t allowed to lend out of them, both out of regulations like the Basel framework, but also because it would violate accountancy rules (deposits are liabilities, and you can’t back a liability with a liability. In reality they create the loan (asset) with a corresponding liability (the deposit). The Bank of England (basically the UK federal bank) has published a good article on this - https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
- empath75 8y agoMoney is fungible so it doesn’t really matter where they’re getting the money from. They certainly aren’t keeping those deposits in a vault somewhere.
- zeroxfe 8y ago> In reality they create the loan (asset) with a corresponding liability (the deposit). Isn't that just a book-keeping technicality? Fundamentally, the bank is still using deposits to leverage a loan. Or am I misunderstanding your point?
- empath75 8y agoSo basically I deposit $1000. Someone else goes to the bank and says ‘I want to borrow $1000’ Great the bank says, approved. And they set up a bank account for you that says you have $1000 in it. Now they’ve got $1000 in reserves and 2 accounts that claim to have $1000 in it. Now when you withdraw $500 where does that money come from? I can assure you it’s not from the banker’s wallet. That’s coming out of my deposit. Not from my account because my account still says they have $1000 on hold for me, it comes from the actual cash I deposited. (Which of course isn’t actually cash in most cases) None of that matters in practice because unless everyone tries to withdraw all the money at once there’s plenty to cover all the withdrawals, but they are definitely using money from deposits to cover withdrawals.
- comboy 8y agoA good starting point for those who want to learn something about the FED: https://www.youtube.com/watch?v=mQUhJTxK5mA https://www.youtube.com/watch?v=mQUhJTxK5mA Just the basics, but I doubt these are obvious to everybody.
- HIPisTheAnswer 8y agoRepost: let the down voters explain themselves, or prove their lack of argument by throwing their pathetic down votes. There is only one banknote in the US, so there is only one bank. A lent deposit is no deposit. A dollar is 25 grains of gold.
- sctb 8y agoSince you keep breaking the guidelines over and over we've banned the account. We're happy to unban accounts if you email hn@ycombinator.com and we believe you'll start following them. https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html
- captainmuon 8y agoUnless I'm missing something, why doesn't every bank have an "internal narrow bank" that takes deposits and puts them at the central bank? Actually, I thought that is exactly how banks have to operate right now... All deposits are settled in the interbank system or ultimately with the central bank. You can't just deposit money in a bank, because "depositing" $100 means telling an upstream bank that your bank now owes you $100.
- incompatible 8y agoThey can do, quite a lot of money is on deposit at the Fed. But they may find it more profitable to lend the money elsewhere. All true government issued money is either in the form of banknotes and coins or deposits held at the central bank.
- pas 8y agoWhat is gov issued money? The money created by the fed is gov issued too, no? And it sits on the Fed's balance sheet as liability, debt, but not as deposit.
- incompatible 8y agoFor simplicity I'm taking the Fed as part of the government. I know the setup in the USA is a bit strange. A government can create as much money as it likes, debt on a balance sheet is an optional accounting detail.
- thelasthuman 8y agoSo the federal reserve isn't part of the government?
- lesserknowndan 8y agoDebt is created not money. You can’t pay the ferryman with an IOU from a bank.
- febeling 8y agoDebt is not money, but it has a flipside, the debt claim, which can be readily converted into money at a (central) bank. That's the fundemantal if somewhat hidden mechanism of our monetary system.
- goodcanadian 8y agoActually, that is pretty much exactly how it works. Banknotes (i.e. cash), are explicitly IOUs from a bank. Usually, it is a central bank, such as the Bank of England, but sometimes, it could be another bank. There are three retail banks in Scotland that are authorised to issue banknotes: https://en.m.wikipedia.org/wiki/Banknotes_of_Scotland https://en.m.wikipedia.org/wiki/Banknotes_of_Scotland
- twic 8y agoWhy is it so crucial to their business model that the customers' deposits are deposited directly with the Fed, rather than lent out to other banks on the overnight Fed Funds market? The Fed Funds rate is typically lower than the IOER rate paid on deposits with the Fed, but only by a small amount: since early 2009 the fed funds rate has generally been 5 to 20 basis points (one basis point is equal to 0.01 percentage points) lower than the IOER [1] For example, money lent out on the Fed Funds market on thursday earned 1.92% [2], while money deposited with the Fed earned 1.95% [3]. The Not-Quite-So-Narrow Bank wouldn't be able to pay as high a rate of interest to depositors as the true Narrow Bank, but it also wouldn't be dependent on the cooperation of the Fed, and Congress's authorization to the Fed, in collecting the IOER rate. While looking up those numbers, i came across a nice detailed series of posts by George Selgin on IOER [4] and the Narrow Bank in particular [5] [6] - well worth a read. [1] https://www.stlouisfed.org/publications/regional-economist/april-2016/interest-rate-control-is-more-complicated-than-you-thought https://www.stlouisfed.org/publications/regional-economist/a... [2] https://apps.newyorkfed.org/markets/autorates/fed%20funds https://apps.newyorkfed.org/markets/autorates/fed%20funds [3] https://www.federalreserve.gov/monetarypolicy/reqresbalances.htm https://www.federalreserve.gov/monetarypolicy/reqresbalances... [4] https://www.alt-m.org/2017/06/01/ioer-and-banks-demand-for-reserves-yet-again/ https://www.alt-m.org/2017/06/01/ioer-and-banks-demand-for-r... [5] https://www.alt-m.org/2018/09/10/the-skinny-on-the-narrow-bank/ https://www.alt-m.org/2018/09/10/the-skinny-on-the-narrow-ba... [6] https://www.alt-m.org/2018/09/14/the-narrow-bank-a-follow-up/ https://www.alt-m.org/2018/09/14/the-narrow-bank-a-follow-up...
- srgseg 8y agoBecause then you have counterparty risk, which means you then have greater regulatory/compliance costs and have to pay up to 0.4% on assets for FDIC insurance.
- twic 8y agoCounterparty risk on Fed Funds loans, which are for one day only and to solid, highly regulated financial institutions, is negligible - that's why it's treated as the risk-free rate. Would you need FDIC insurance if you only took deposits from financial institutions?
- apo 8y ago... The central bank may worry that narrow banks, which lend to neither companies nor individuals, could hamper the effectiveness of monetary policy. Their business model may also risk unsettling incumbent banks, which could have large economic consequences. ... This is almost certainly a big reason for the opposition. The Federal reserve wants to keep people from "hoarding" (saving) money at all costs. Driving down interest rates and causing inflation is one tactic. Preventing the emergence of banks who can out-compete the rest of the market on interest rates is another.
- ttul 8y agoThe Fed is probably concerned that, if the idea catches on, trillions in deposits could be vacuumed out of the fractional reserve banking system, leaving less available for lending. If that were to happen, the Fed would lose considerable influence over liquidity. Its only lever on narrow banks would be to adjust the deposit rate encouraging savers to go elsewhere.