A meeting to be held by Connecticut Banking Commissioner Jorge Perez on Friday could have broad implications for one of the state’s de novo banks.
The meeting will decide whether TNB USA Inc. can continue to operate under a temporary certificate of authority – if the request is denied, TNB would have to reapply for a new certificate.
The temporary certificate, which lasts for 18 months, is part of Connecticut’s de novo bank application process. They can be extended, but significant progress toward the organization of the institution must be shown.
TNB, however, has had a difficult time making progress. The bank in organization sued the Federal Reserve Bank of New York after it did not grant TNB a master account over concerns with its business model. A master account grants banks access to the Fed’s payments system.
TNB’s business model is not like other de novos, or other banks in general.
The group behind the bank in organization, which is being led by former New York Fed executive vice president James McAndrews, is planning to operate under a narrow banking model.
That means TNB will not offer FDIC insurance or originate loans, but instead have one purpose: Collecting deposits, mainly from large institutional money market investors, and placing those deposits in a master account in the New York Fed.
The purpose of this model is to allow depositors to earn higher rates of interest than are currently available to nonfinancial companies and consumers in a safe, liquid form of deposit.
Back in 2008, the Federal Reserve began paying interest on bank reserves to provide incentive for banks to hold onto reserves. This interest is referred to as the interest on excess reserves. The IOER is closely linked to the federal funds rate and sat at 2.4 percent as of Jan. 19.
“Narrow banking can deliver both safety and competition for deposits,” said McAndrews at a recent forum hosted by the American Enterprise Institute. “Narrow banks offer an important way to address the lack of competition and flighty concerns about financial stability.”
Banks tend to profit off the IOER because they pay a smaller rate to customers. While the IOER is currently around 2.4 percent, this is hardly what banks have paid out on deposits.
As of this month, the FDIC reported that jumbo deposits ($100,000 or more) earned on average six basis points from checking accounts, nine basis points from savings accounts and 26 basis points from a money market account.
In its lawsuit against the New York Fed, TNB is alleging that by refusing to open a master account for the group, the institution is essentially protecting larger banks from competition.
TNB has argued that the New York Fed is legally required to provide master accounts to all depository institutions engaged in the business of receiving deposits other than trust funds on an equal and non-discriminatory basis.
The group has also argued in court documents that the New York Fed understood they had no legal basis to refuse a master account application and intended to get around issuing one by delaying the process until TNB gave up.
The New York Fed has responded to TNB’s lawsuit, saying in a letter to district court that TNB’s model raises major “policy concerns.” The New York Fed has requested the judge overseeing the case to reject the argument that it is required by law to grant access to TNB.
Some critics say that narrow banks could destabilize the financial system by drawing away cheap funding from commercial banks and creating an overreliance on the Federal Reserve, among other issues.
However, Paul Kupiec, a scholar at the American Enterprise Institute, asserts that if TNB follows its business model, it would be the safest bank on the planet.
“Narrow banking means avoid monetary instability and moral hazard created by banking safety nets,” he said at a forum. “Narrow banks do not need deposit insurance or emergence liquidity to maintain customers confidence.”
