The Marriner S. Eccles Federal Reserve building stands in Washington, D.C. (Photographer: Andrew Harrer/Bloomberg)

Why Is This Supersafe Bank Scaring the Fed?

(Bloomberg Businessweek) -- The Federal Reserve is, among other things, a bank for banks: They keep deposits there and earn interest at a rate currently set at 1.95 percent. Big institutional investors that aren’t banks can also deposit money at the Fed, but they use a different program with a lower interest rate: 1.75 percent.

This suggests an obvious trade. An institution could deposit money with a bank, which would then turn around and deposit it with the Fed. The Fed pays the bank 1.95 percent interest, the bank collects a fee for its trouble, and the institution gets the balance—say, 1.9 percent.

In fact, a bank has started up to do exactly this. It’s called TNB USA Inc., which stands for The Narrow Bank, a reference to a business model that’s as narrow as can be. All it would do is take deposits from institutions, plop them into its Fed account, and pass along the interest earned. Because its functions would be limited, its costs would be low. More important, its risks would be low. By putting its money only in Fed reserves—rather than mortgages or business loans or securities or derivatives or any of the other things regular banks get up to—it could do what they can’t: give large institutional customers absolute assurance they’ll get all their money back.

There’s a hitch in TNB’s plan. When it applied to open an account with the New York Fed, the Fed said no. Now TNB is suing, arguing not only that the law requires the Fed to give it an account but also that the Fed should want to. Institutional investors looking to park cash somewhere safe tend to skip smaller banks, preferring the stability of the too-big-to-fail ones. TNB’s stability comes not from its size but from its narrow business model: It can offer high rates and more safety than a big bank, injecting much-needed competition into the marketplace.

The Fed hasn’t yet said why it denied TNB an account. But you can see how that business model—and that sort of competition—might worry a central bank. The point of a banking system is not to be as safe as possible—or not just that, anyway. The point of banking is to mobilize capital, to pool society’s wealth so it can be invested in productive endeavors. “The money’s not here,” says George Bailey in It’s a Wonderful Life, film’s most famous depiction of banking. “Your money’s in Joe’s house—that’s right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others.” That regular banks take deposits and invest them in mortgages and business loans makes them risky, but it also makes them useful.

Narrow banking cuts right through all of that. It offers institutions big deposits that really are safe but don’t get put to work in mortgages or business loans or anything else. They’re just held in reserve at the Fed, safe but sterile, pure abstract money rather than risky but productive claims on the work of other people. As a trade, it’s as safe as can be; but as a business model, it’s a little scary. —Levine is a finance columnist for Bloomberg Opinion.

To contact the editor responsible for this story: Jillian Goodman at

©2018 Bloomberg L.P.