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You’re describing “narrow” banks. While they make sense for consumers, our banking system is tightly coupled with another: mortgages. The money that you deposi

by tyre 7y ago

You’re describing “narrow” banks. While they make sense for consumers, our banking system is tightly coupled with another: mortgages. The money that you deposit is loaned out. Could the federal government do the too? Sure, and the government (talking about the US here) does end up owning a large chunk of mortgages via Fannie Mae and Freddie Mac. But the expertise and the manpower around vetting the mortgages is a _lot_ of work. Work that the federal government couldn’t decide to take on tomorrow, might not even want to, and if they announced that they were going to try would shake the core of the stock markets. (And yes, stock markets matter for more than just making rich people richer.) On the other hand you suggest de-coupling: “Find a lender.” If you take away the deposits, who has that much money to lend out without being dangerously leveraged? If you were to design an economic system, this might be the one you’d design. Given the one we have, narrow banks are difficult to allow without some significant “turbulence”.

toomuchtodo 7y ago
It is rare today that banks hold mortgages and use depositor funds to fund them. Most (government backed, such as FHA, Fannie, and Freddie) mortgages are securitized and sold on the secondary market to bondholders (there are caveats for small banks, credit unions, and non-qm lenders). A narrow bank does not require lending to service deposit accounts. It doesn't even need to pay interest to account holders. It simply needs to accept, store, and distribute fiat on the behalf of its customers via ACH, debit, and credit processing networks. Think prepaid card with no fees and no overdraft capability. The Federal Reserve is culpable in that it will not approve banking licenses for narrow banks [1], as it challenges the business model of existing entrenched banking organizations. Can you build a narrow bank without getting the Fed to sign off? That is a conversation I would be interested in having over a cup of coffee. [1] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/49204495 https://www.spglobal.com/marketintelligence/en/news-insights...
- SilasX 7y ago
  Really? You mean, even an existing (approved) bank can't just one day decide to stop lending and revert to narrow functions?
  - toomuchtodo 7y ago
    They could, but would see a reduction in income by doing so, therefore an unlikely occurrence. I don’t see many banks willingly walk away from low risk income.
    - SilasX 7y ago
      Yes, but you were saying that the impediment was a legal one. I'm asking if that's really true, given that a(n approved) bank can just elect not to provide some services. Surely that can't be illegal.
      - toomuchtodo 7y ago
        I’m speaking about starting a new bank, and obtaining a bank license to do so.
        SilasX 7y ago
        You were speaking about the general possibility of running narrow banking. Whether it is a new bank or existing bank doesn't matter to that point, so you can't dismiss the possibility of an existing bank doing it and thereby claim it's impossible because a new bank couldn't get a license on that premise. "Narrow banking is impossible." 'What if you did it this way?' "I'm not talking about that, I'm talking about the impossible ways."
        toomuchtodo 7y ago
        I apologize if my citation and my explanation were not clear enough to convey the concept in my original comment ("Federal Reserve will not issue banking licenses to allow new banking entrants to operate as narrow banks").
        SilasX 7y ago
        That point was plenty clear, and I was not disputing it, so no need for an apology. The more relevant point here is whether narrow banking is legal at all, and I was trying to bring the discussion over to that point. If your point was merely to cite some non-blocking barrier to narrow banking, than I don't really see why you brought it up. If you want to apologize, apologize for being technically correct at the expense of providing insight.
clairity 7y ago
> "If you take away the deposits, who has that much money to lend out without being dangerously leveraged?" mortgages don't have to go through retail banks, and there are plenty of other transaction fees to support banks of all sorts. in fact, there's no reason we should have allowed the consolidation of banking other than to allow rent-seekers to amalgamate more sources of relatively risk-free cash flows under the control of fewer and greedier hands. we could have maintained lots of small banks that serve the community and region, enriching those communities, rather than a few behemoths that strip-mine them. a lot of the "work" of mortgages is really mindless paper-shuffling by other rent-seekers taking their little slice of the large transaction price. none of those service providers go away if the government decided to take over (not that i'm advocating such a takeover).
JadeNB 7y ago
> But the expertise and the manpower around vetting the mortgages is a _lot_ of work. Not to be snarky, but the Great Recession didn't give me a lot of confidence in the expertise involved in vetting mortgages.
- chrisco255 7y ago
  This is correct. I worked in real estate prior to the collapse. By 2006, Bank of America and others had already moved to an entirely automated appraisal process and people were able to get loans in excess of 35% of their monthly income no problem.

by tyre 7y ago

toomuchtodo 7y ago

It is rare today that banks hold mortgages and use depositor funds to fund them. Most (government backed, such as FHA, Fannie, and Freddie) mortgages are securitized and sold on the secondary market to bondholders (there are caveats for small banks, credit unions, and non-qm lenders). A narrow bank does not require lending to service deposit accounts. It doesn't even need to pay interest to account holders. It simply needs to accept, store, and distribute fiat on the behalf of its customers via ACH, debit, and credit processing networks. Think prepaid card with no fees and no overdraft capability. The Federal Reserve is culpable in that it will not approve banking licenses for narrow banks [1], as it challenges the business model of existing entrenched banking organizations. Can you build a narrow bank without getting the Fed to sign off? That is a conversation I would be interested in having over a cup of coffee. [1] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/49204495 https://www.spglobal.com/marketintelligence/en/news-insights...

SilasX 7y ago
Really? You mean, even an existing (approved) bank can't just one day decide to stop lending and revert to narrow functions?
- toomuchtodo 7y ago
  They could, but would see a reduction in income by doing so, therefore an unlikely occurrence. I don’t see many banks willingly walk away from low risk income.
  - SilasX 7y ago
    Yes, but you were saying that the impediment was a legal one. I'm asking if that's really true, given that a(n approved) bank can just elect not to provide some services. Surely that can't be illegal.
    - toomuchtodo 7y ago
      I’m speaking about starting a new bank, and obtaining a bank license to do so.
      - SilasX 7y ago
        You were speaking about the general possibility of running narrow banking. Whether it is a new bank or existing bank doesn't matter to that point, so you can't dismiss the possibility of an existing bank doing it and thereby claim it's impossible because a new bank couldn't get a license on that premise. "Narrow banking is impossible." 'What if you did it this way?' "I'm not talking about that, I'm talking about the impossible ways."
        toomuchtodo 7y ago
        I apologize if my citation and my explanation were not clear enough to convey the concept in my original comment ("Federal Reserve will not issue banking licenses to allow new banking entrants to operate as narrow banks").
        SilasX 7y ago
        That point was plenty clear, and I was not disputing it, so no need for an apology. The more relevant point here is whether narrow banking is legal at all, and I was trying to bring the discussion over to that point. If your point was merely to cite some non-blocking barrier to narrow banking, than I don't really see why you brought it up. If you want to apologize, apologize for being technically correct at the expense of providing insight.

clairity 7y ago

> "If you take away the deposits, who has that much money to lend out without being dangerously leveraged?" mortgages don't have to go through retail banks, and there are plenty of other transaction fees to support banks of all sorts. in fact, there's no reason we should have allowed the consolidation of banking other than to allow rent-seekers to amalgamate more sources of relatively risk-free cash flows under the control of fewer and greedier hands. we could have maintained lots of small banks that serve the community and region, enriching those communities, rather than a few behemoths that strip-mine them. a lot of the "work" of mortgages is really mindless paper-shuffling by other rent-seekers taking their little slice of the large transaction price. none of those service providers go away if the government decided to take over (not that i'm advocating such a takeover).

JadeNB 7y ago

> But the expertise and the manpower around vetting the mortgages is a _lot_ of work. Not to be snarky, but the Great Recession didn't give me a lot of confidence in the expertise involved in vetting mortgages.

chrisco255 7y ago
This is correct. I worked in real estate prior to the collapse. By 2006, Bank of America and others had already moved to an entirely automated appraisal process and people were able to get loans in excess of 35% of their monthly income no problem.