Fed Foils Narrow Bank Idea
A press release entitled, "Federal Reserve Board issues advance notice of proposed rulemaking seeking public comment on whether to amend Regulation D to lower certain interest rates paid on balances at Federal Reserve Banks," indicates that the Fed intends to prevent the idea of a "narrow bank," we learned from RBC Capital Markets' Mike Cloherty. He comments, "Narrow banks had received a great deal of press attention last fall, but to date none of them exists (no charters have been granted). The Fed seems to have been reluctant to approve this structure in part because it would greatly complicate the operational mechanics of monetary policy by creating much more volatility in reserve demand (and in bank deposits) and unpredictable shifts in intermediation. The narrow bank model had been to take deposits and leave 100% of the cash at the Fed, earning IOER. Depositors would receive IOER minus some fee." Cloherty adds, "This could have caused large swings in reserve demand (reserve demand will still be volatile without narrow banks) and large swings in bank deposits as cash flowed back and forth from a traditional bank to a narrow bank. The Fed has proposed changing its regulations so that narrow banks (which they call Pass-Through Investment Entities) would receive a lower IOER rate than normal banks. If the Fed had the ability to pay narrow banks a lower rate, it would be difficult for narrow banks to grow to a size where they would become disruptive to money markets or Fed policy. This question mark for the balance sheet size seems to have been erased." (See our Sept. 16, 2018 News, "Fed Delays IOER Bank.")
