Re:Risky bank debt makes customers safer
by JumpCrisscross on Monday May 29, 2023 @05:19AM
(#36112204)
> What is perplexing is the government has not allowed a “narrow bank” that simply passes deposits into treasuries, which would be much safer
Narrow banks pass deposits into reserves. It is a good idea. It probably needs new statute to work.
It doesn’t make sense to pay the same interest on narrow-bank reserves as on risk reserves because the narrow bank, by design, must hold those reserves. The central bank doesn’t have to compete with other assets to drain that liquidity from the economy. Whether the rate paid to the narrow bank by the Fed is zero, de minimis, the repo rate or negative is a political question more than a monetary one. (Put another way: Interest on excess reserves is a crisis-era invention [1]. A narrow bank has, by definition, no excess reserves.)
Narrow banks pass deposits into reserves. It is a good idea. It probably needs new statute to work.
It doesn’t make sense to pay the same interest on narrow-bank reserves as on risk reserves because the narrow bank, by design, must hold those reserves. The central bank doesn’t have to compete with other assets to drain that liquidity from the economy. Whether the rate paid to the narrow bank by the Fed is zero, de minimis, the repo rate or negative is a political question more than a monetary one. (Put another way: Interest on excess reserves is a crisis-era invention [1]. A narrow bank has, by definition, no excess reserves.)
[1] https://www.federalreserve.gov/monetarypolicy/reserve-balanc...