Thread by @GeorgeSelgin

.@rohangrey's suggestion that the Fed's unwillingness to grant a master account to TNB ("The Narrow Bank") means that it is just as unlikely to grant such accounts to Avanti and other fintechs seems mistaken to me. blockworks.co/legal-expert-a…

The Fed has reasons for refusing Master Accounts to TNB and other "Pass Through Investment Entities" (PTIEs) that don't apply to other fintechs seeking such accounts. In particular, it wishes to preserve the differential rates it offers to banks and MMFs and other counterparties.

The sole raison d'etre of PTIEs like TNB is to eliminate that differential--the IOR-ON-RRP spread--by allowing non-bank ON-RRP counterparties to earn the IOR rate. (For this reason, allowing them master accounts that pay only the ON-RRP rate or less would be = no accounts.)

In contrast, Avanti, Kraken, and other fintechs w/ "special purpose" bank charters that make them eligible for master accounts seek them not primarily to earn IOR, but as a means for gaining direct access to the Fed's USD settlement services.

In this way, they can supply retail payment services to their clients--and especially to clients seeking to engage in cryptocurrency transactions, who are not well served by ordinary banks--more efficiently and reliably than they could if they had to partner w/ commercial banks.

The return such special-purpose banks earn on their USD deposits isn't crucial. Yet it would make sense for the Fed to pay the full IOR rate on their master accounts, while insisting that they maintain 100% master account balances against their USD deposits.

This requirement would make fintechs w/ Fed master accounts "narrow banks," albeit with a very different purpose than The Narrow Bank.

It would also make it pointless to worry, as Grey does, about banks "falling through the cracks created by them not having FDIC insurance.” And the Fed can easily make "narrow" banking a necessary, though not sufficient, condition for granting master accounts to fintechs.

In fact, provided they can earn the IOR, Fintechs would have little to lose by accepting "narrowness" as the price for gaining master accounts, because they couldn't earn much more, and might even earn less, by holding other level-1 HQLA securities.

Oh, didn't you know? Wyoming limits SPDI investments to level-1 HQLAs only. So what "Wyoming happens to think is an adequate alternative to FDIC insurance" isn't really that crazy.
drive.google.com/file/d/1EVLJjk…

It far from obvious that Wyoming's rules themselves would "undermin[e] the broader federal regulatory framework aimed at the banking system" when they are in some respects stricter than those applied to other banks.

But the Fed needn't rely on solely on those rules in deciding whether to grant master accounts to its SPDIs: it can insist on stricture rules, including 100% investment of dollar deposits in master account balances, as I suggested in May: cato.org/sites/cato.org…

Of course ordinary banks will not welcome such a development, which by ending their exclusive access to the fed's books and settlement services, would make for a much more contestable market for retail payments services.

So we may confidently expect the banking lobby to oppose even "narrow" fintech access to the Fed, to exaggerate the risks entailed in granting such access, and to urge that fintechs be subject to the full gamut of bank regulations.

But we might wish that persons unaffiliated with the banking industry would resist joining forces with it by endorsing and repeating misleading claims about the risks SPDIs pose.

Att'n: @jp_koning @CaitlinLong_ @DanAwrey @DavidBeckworth @nic__carter @Frances_Coppola @WilliamJLuther

and @thesamreynolds