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A new ultra-safe kind of bank may emerge, but the Fed's not interested: Bloomberg

Oct. 23, 2018 3:18 PM ETISHG, BWZ, MINT, NEAR, RAVI, ULST, FTSD, ICSH, HOLD, FTSM, FMHIBy: Liz Kiesche, SA News Editor2 Comments
  • James McAndrews, a former co-director of research at the New York Fed, wants to start a new kind of bank--an ultra-safe private bank whose only purpose is to park institutional investors' cash at the Federal Reserve, Bloomberg reports.
  • Apparently the Fed won't let him open an account. So his bank TNB USA--it stands for the narrow bank--is suing the Fed to let it open an account that earns a higher interest rate than most, which would then be passed on to its depositors.
  • At this point, only a relatively small group of commercial banks with master accounts at the New York Fed can earn what’s called the interest on excess reserves rate--or IOER--from the government on their deposits. Several others have access to the Fed's lower-paying overnight reverse repurchase agreement facility.
  • If these new "narrow" banks emerge, then the deposits that TNB attract would likely be pulled from banks that can't offer a competitive rate or from some money-market fund options, according to Alex Roever, head of U.S. rates strategy at JPMorgan Chase.
  • If McAndrews succeeds, it could make waves across the financial system, exerting pressure on short-term funding markets and possibly on repurchase agreements and Treasury bills.
  • Previously: Banks see customers pull billions from accounts that don't pay interest: WSJ (Oct. 22)
  • ETFs: MINT, NEAR, RAVI, FTSM, ICSH, HOLD, ULST, FTSD, FMHI, ISHG, BWZ

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