- 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 (NYSE:JPM).
- 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)
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Original article