Published Apr 24, 2019 12:00PM ET
Updated Apr 24, 2019 01:10PM ET
The Fed Fights a New Bank It Fears. The Startup Sees Nothing to Worry About
(Bloomberg) -- The Federal Reserve is trying to kill a fledgling bank before the newfangled business takes root, arguing it’s a dangerous idea. The nascent company says there’s no reason to fret about its plan to give big investors access to the central bank’s highest interest rates.
Figuring out who’s right is no easy task.
James McAndrews, once the New York Fed’s co-director of research, created the bank in 2016, hoping to give pensions, insurers and other large institutional investors higher yields on their cash by parking money at the Fed. Currently, only a select few banks can receive that top-tier rate, now at 2.4 percent. The best that money-market funds -- a popular cash receptacle for the firms McAndrews is targeting -- can get from the Fed is 2.25 percent.
The New York Fed has prevented his company, TNB USA Inc., from opening the type of account it needs to make the business model work. That prompted the firm to sue the central bank last year, saying it was obstructing the project. The Fed found another way to fight back as the case continues to unfold. Last month, it proposed rewriting its rules so TNB or any other potential narrow banks -- so named because they are solely focused on taking deposits -- could only get lower interest rates, sabotaging their raison d’être.
Setting the legal merits aside, the Fed has reason to be conservative when considering the core of its mission: keeping the U.S. economy and financial system safe and healthy. A spokesperson for the New York Fed declined to comment.
“The Fed basically finds itself with a Rube Goldberg machine that happens to be working pretty well,” said Brian Smedley, the head of macroeconomic and investment research at Guggenheim Partners LLC, which manages more than $265 billion. “They don’t want to tinker with it too much because it may break, which is why they seem to find the narrow-bank model to be so problematic.”
TNB disagrees, saying that narrow banks would safely increase interest rates for depositors. “These actions will improve the transmission of monetary policy, much as the Fed itself has done through its overnight reverse repo facility,” McAndrews said Tuesday.
What follows are three problems the Fed has with narrow banks, TNB’s rebuttals and an assessment of the arguments:
Issue #1: Monetary policy
Issue #2: Market volatility
Issue #3: Financial stability
Read more Bloomberg coverage of this fight:
Written By: Bloomberg
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