9 ms·

TNBL: The Narrow Bank, or how you have no right to have safe deposits

18 points by janandonly 4y ago

janandonly 4y ago
As seen on SN: https://stacker.news/items/49651 https://stacker.news/items/49651 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
- astrange 4y ago
  > 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.
  - notahacker 4y ago
    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.
    - tialaramex 4y ago
      > 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.
      - PopAlongKid 4y ago
        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] [0]https://www.irs.gov/charities-non-profits/contributors/other-eligible-donees https://www.irs.gov/charities-non-profits/contributors/other... [1]https://www.irs.gov/charities-non-profits/churches-religious-organizations/special-rules-limiting-irs-authority-to-audit-a-church https://www.irs.gov/charities-non-profits/churches-religious...
pjc50 4y ago
This seems to be a shell company to advocate for a rule change as described here: https://scholarship.law.nd.edu/ndlr_online/vol95/iss1/1/ https://scholarship.law.nd.edu/ndlr_online/vol95/iss1/1/ 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.
- dageshi 4y ago
  Yeah, they won't allow it because it would have disastrous repercussions during a recession/financial crisis.
  - alexvoda 4y ago
    Care to expand on those dangers? Isn't this what is achieved by CBDC (central bank digital currencies). Wouldn't they have the same repercussions?
    - rich_sasha 4y ago
      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.
exabrial 4y ago
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. What am I not understanding?
- notahacker 4y ago
  Loans have defaults, and retail banks have significant running costs
- LatteLazy 4y ago
  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.

18 points by janandonly 4y ago

As seen on SN: https://stacker.news/items/49651 https://stacker.news/items/49651 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

astrange 4y ago
> 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.
- notahacker 4y ago
  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.
  - tialaramex 4y ago
    > 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.
    - PopAlongKid 4y ago
      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] [0]https://www.irs.gov/charities-non-profits/contributors/other-eligible-donees https://www.irs.gov/charities-non-profits/contributors/other... [1]https://www.irs.gov/charities-non-profits/churches-religious-organizations/special-rules-limiting-irs-authority-to-audit-a-church https://www.irs.gov/charities-non-profits/churches-religious...

pjc50 4y ago

This seems to be a shell company to advocate for a rule change as described here: https://scholarship.law.nd.edu/ndlr_online/vol95/iss1/1/ https://scholarship.law.nd.edu/ndlr_online/vol95/iss1/1/ 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.

dageshi 4y ago
Yeah, they won't allow it because it would have disastrous repercussions during a recession/financial crisis.
- alexvoda 4y ago
  Care to expand on those dangers? Isn't this what is achieved by CBDC (central bank digital currencies). Wouldn't they have the same repercussions?
  - rich_sasha 4y ago
    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.

exabrial 4y ago

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. What am I not understanding?

notahacker 4y ago
Loans have defaults, and retail banks have significant running costs
LatteLazy 4y ago
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.