Thursday, June 10, 2021

Why won't banks take your money?

 Banks to Companies: No More Deposits, Please, says the puzzling headline at WSJ. 

Why would bankers not want to take any amount of deposits, park them in reserves at the Fed or short term Treasury bills, charge fees and a slight interest spread, and sign up for an early tee-time at the local golf club? Sure "net interest margin" or other metrics might not look good, but money is money and more money is more money. 

The answer: 

Top of mind for many big banks is a rule requiring them to hold [sic] capital equivalent to at least 3% of all assets. Worried about the rule’s impact during the pandemic, the Fed changed the calculation in 2020 to ignore deposits the banks held at the central bank, but ended that break this March. Since then, some banks have warned the growing deposits could force them to raise more capital, or say no to deposits.

This is a fascinating little insight into the crazy world of our Fed's risk regulation. 

Taking deposits and investing in reserves is a risk free business. The Fed should be encouraging narrow banks, not harassing the few that try, or squashing narrow-banking activity. Perhaps the Fed is so unsure of its regulatory tools that it must put a capital charge in on this clearly risk free activity. But looked at either way it does not validate the usual cheerleading for the fine-toothed dirigisme of the hundreds of thousands of pages of bank regulation that they cannot recognize this simple fact. On to regulating climate and inequality... 

In recent months, banks including BNY Mellon have focused on moving clients from deposits into money-market funds, which are common cash-like investments. Assets in money-market accounts, even ones run by the same bank, are treated differently under bank capital rules, alleviating some of the regulatory pressure.

The money-market funds, in turn, need new places to park all that new cash and earn some interest. But rock-bottom interest rates have pushed them into storing it back at the Federal Reserve overnight...

Proving the point. Just hang a sign "money market fund" on the same activity and it needs no capital. 

To be clear, I think banks should be required to issue lots and lots more capital to fund risky investments. And deposits should flow to reserves via narrow banks that need essentially no capital. Perhaps it is the commingling in bankruptcy that forces a 3% capital charge on narrow banking within a bank. Still, the affair reveals just what a mess the whole effort is. If they can't get this one right, imagine what the rest looks like. 


  1. It's so called free money that they that to back with capital. What does it say that even in this case of pure profits banks would still rather not raise capital and prefer to forego those earnings? What is the big reason for this?

  2. Top down rules do not seem to be becoming more rational over time, in contradiction to standard progressive assumptions. Be it health care, education, or bank regulation.

  3. Remember just 6 years ago when ONRRP facilities were supposedly a source of potential risk?

    Perhaps 6 years from now they'll realize reserves and narrow banks are not risky.

  4. Where will all that cash be parked at last? Do they leave banks at all?

  5. Or the FOMC could simply sell off the $5 Trillion + in government bonds that it currently holds.

    Oh wait, that might cause interest rates to rise and force Congress (with $27 trillion in debt outstanding) to raise taxes, cut spending, or sell equity.


    "To be clear, I think banks should be required to issue lots and lots more capital to fund risky investments."

    One more regulation John, that's what you think we need?

    1. John has said several times that a requirement for more equity would allow us to have far fewer other regulations on banks. An equity cushion provides much better systemic risk reduction than countless other regulations on the books.

  6. John,

    "To be clear, I think banks should be required to issue lots and lots more capital to fund risky investments.

    To be clear, the Chicago Plan was rejected by Congress in 1939 and hasn't gotten any better with age.

    Time to get over it.

    1. That's why Keynes wrote the General Theory. UK treasury wouldn't do the sensible thing!

    2. The sensible thing for any Treasury (UK or in the US at that time - Andrew Mellon) would be to sell equity claims against future tax revenue rather than bonds.

      In that way risk is taken by choice rather than forced down the throat of the populace via devaluation, inflation, or outright default.

      But try telling that to numerous generations of war dog economists (J. Cochrane included) and all that you get is incoherent ramblings and blank stares.

  7. Can you explain the last paragraph? I have many questions:

    1. Wouldn't a narrow bank decrease the supply of deposits for banks, thereby decreasing the amount they can lend?

    2. What would you do to make bank lending take on more risk?

    3. What commingling are you referring to?

    4. By "3% capital charge" is this a reserve requirement? Or something else?



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