Federal Reserve Is Sued, Accused of Limiting Competition
WASHINGTON — A former Federal Reserve official is suing the Fed for blocking his plan to create a new kind of bank, saying it is putting the interests of big Wall Street banks ahead of their large customers.
The lawsuit, filed in federal court last week, accuses the Fed chairman, Jerome H. Powell, of preventing the new bank, known as TNB USA, from operating. James McAndrews, who filed the lawsuit, asserts Mr. Powell directed Fed staffers to withhold permission for his bank to open an account at the Federal Reserve Bank of New York — a necessary precursor for TNB USA to open its doors.
“We are aware of the lawsuit and we are reviewing it,” a Fed spokeswoman said.
TNB USA would function quite differently from existing banks. It would not make any loans. Instead, it would put all of its customer deposits into an account at the New York Fed.
The bank is seeking to take advantage of a space that the Fed created in 2015 when it overhauled the mechanics of monetary policy. Before the 2008 financial crisis, when the Fed wanted to slow economic growth, it drained money from the financial system. Now, instead of removing money from the system, the Fed seeks to immobilize money by paying banks to maintain deposits at the Federal Reserve.
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The Fed pays banks a rate of 1.95 percent on those deposits; the banks then pay a lower rate on the money they collect from customers, like large institutional investors. To limit the banks’ profit margin, the Fed also offers to pay a somewhat lower rate, currently 1.75 percent, directly to non-banks.
TNB USA would pay a rate between 1.75 percent and 1.95 percent on large deposits from institutions like mutual funds, putting pressure on other banks to increase rates for those customers.
“What you want is a good competitor that will pay the interest on reserves to depositors so that all of the rent doesn’t get soaked up by the banks, which is what’s happening right now,” Mr. McAndrews said Thursday.
Mr. McAndrews contributed to the creation of the current system as head of research at the New York Fed between 2010 and 2016. He left the Fed in 2016 and obtained a banking charter from Connecticut the next year. In August 2017, TNB USA applied for an account at the New York Fed.
The creation of any kind of new bank has become extremely unusual since the 2008 financial crisis. Just seven banks were chartered in the United States in the five years between 2013 and 2017. By contrast, 750 banks were chartered in the five years before the crisis.
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Mr. McAndrews said he met with Fed officials and was given the impression the bank’s application would be approved. But, according to the lawsuit, the Fed has withheld permission “at the specific direction of the Board’s Chairman,” a reference to Mr. Powell.
The Fed has not explained its reasons, but proposals for banks similar to TNB USA — usually described as “narrow banks” — have long circulated among academics, and arguments on both sides are well rehearsed.
Proponents say that institutional investors need safe parking spaces where they can easily access their money, and narrow banks would be safer than existing options, like short-term “commercial paper” lending to corporations.
“If the Fed is worried about financial crises, it ought to encourage narrow banks and give others a gold star for using them rather than shadier short-term assets in the first place,” John Cochrane, an economist at Stanford University, wrote in a blog post endorsing Mr. McAndrew’s plans.
Critics worry that narrow banks could destabilize the financial system, f by, or example, drawing depositors away from commercial banks, forcing an increased reliance on riskier sources of funding.
The Fed also faces political pressure to limit its interest payments on reserves: the Fed made $25.8 billion in interest payments to banks in 2017.The Fed is simultaneously increasing the rate it pays on deposits, and reducing the volume of deposits by gradually draining money from the system.
Mr. McAndrews, however, points out that the Fed is already in the business he is seeking to enter. In addition to taking money from non-bank financial firms, the Fed pays interest on deposits from foreign central banks and on deposits from “financial utilities” like the Chicago Mercantile Exchange.
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And if narrow banking caused problems, Mr. McAndrews said, the Fed has the power to pay a lower rate of interest on deposits from his bank. The Fed, in other words, could put him out of business.
“It’s not rational that they’re stopping us from getting our toes wet,” he said.
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