WEBVTT - How To Create The Safest Bank In America 0:00:10.680 --> 0:00:14.400 Hello, and welcome to another episode of the out Locks podcast. 0:00:14.480 --> 0:00:19.439 I'm Joe, Wasn'tal, And I'm Tracy Allowin. Uh, Tracy. You 0:00:19.480 --> 0:00:23.520 know what I'm really happy about? It could be any 0:00:23.600 --> 0:00:30.440 number of things great, that's true, but specifically I'm happy 0:00:30.640 --> 0:00:34.680 that the tent anniversary of the Lehman Brothers crisis happened 0:00:34.720 --> 0:00:37.920 on a weekend this year because I'm not really that 0:00:38.240 --> 0:00:41.280 I'm not really that crazy about all the anniversary coverage 0:00:41.320 --> 0:00:45.760 and I think, come on, we relive our glory days. No, 0:00:46.040 --> 0:00:49.160 I don't really like reliving it and everyone telling their 0:00:49.240 --> 0:00:53.080 stories over and over again. And I think the a 0:00:53.120 --> 0:00:55.280 lot of the lessons from that time are important and 0:00:55.320 --> 0:00:58.080 we should still talk about them. But I'm just kind 0:00:58.120 --> 0:01:00.680 of a little bit over, like, oh, this is what 0:01:00.800 --> 0:01:04.360 happened that day and all the details from them. Are 0:01:04.360 --> 0:01:06.800 you telling me that we are not going to do 0:01:07.040 --> 0:01:11.839 a Lehman Brothers anniversary podcast. We we are skipping over 0:01:11.880 --> 0:01:14.840 that one. Plus by the time it would even come out, 0:01:14.840 --> 0:01:16.839 because we're talking about this, it would be too late. 0:01:17.280 --> 0:01:19.840 So that I think there are interesting lessons and all 0:01:19.920 --> 0:01:23.440 that from the crisis and the collapse of banks and stuff, 0:01:23.840 --> 0:01:26.679 but I'm just sort of glad that the tenth anniversary 0:01:26.720 --> 0:01:29.360 is over. Do you know what people forget about? That 0:01:29.480 --> 0:01:34.080 was actually arguably scarier than Lehman Brothers collapsing at that time, 0:01:34.280 --> 0:01:36.440 and it happened like I think it was the day 0:01:36.560 --> 0:01:39.240 after Lehman Brothers, or maybe a couple of days after. 0:01:41.000 --> 0:01:43.680 Are you going to say the reserve fund, the money 0:01:43.680 --> 0:01:47.200 market Yes, yes, the money market fund that broke the buck. 0:01:47.720 --> 0:01:50.800 That was huge. People forgot about that right there, and 0:01:50.840 --> 0:01:55.760 that's also the thing that probably got um well every 0:01:55.800 --> 0:01:59.760 ball the mainstream remembers Lehman or Lehman the sort of 0:02:00.040 --> 0:02:02.680 to know people talk about the money market fund that 0:02:02.720 --> 0:02:06.960 broke the book. Anyway. I bring this up because one 0:02:07.000 --> 0:02:10.040 thing that I do think is very relevant, um in 0:02:10.160 --> 0:02:14.560 terms of ten years after, is this general frustration that 0:02:14.720 --> 0:02:20.000 after the financial system was rebuilt post crisis, it basically 0:02:20.440 --> 0:02:22.600 looks the same as it did pre crisis. Like there 0:02:22.680 --> 0:02:25.800 might be less risk and bank balance sheets might be healthier, 0:02:25.880 --> 0:02:31.359 and uh, households aren't. Um so is leveraged to their 0:02:31.400 --> 0:02:33.560 homes as they were in two thousand five, two thousand 0:02:33.560 --> 0:02:37.000 and six. But by and large, we rebuilt the same 0:02:37.040 --> 0:02:41.160 financial system we had before, right, I think you could say, 0:02:41.160 --> 0:02:44.560 there's been some tinkering around the edges, like, for instance, 0:02:44.560 --> 0:02:47.120 you did have money market reform, but certainly when it 0:02:47.160 --> 0:02:49.360 comes to the banks, a lot of the criticism that 0:02:49.400 --> 0:02:52.160 you hear nowadays is that not only did we not 0:02:52.320 --> 0:02:57.359 reform the banks, but the biggest banks have gotten even bigger. Right. 0:02:57.440 --> 0:03:01.320 We definitely didn't as a country, as a regulatory system, 0:03:01.360 --> 0:03:05.280 as a financial system, did not use the crisis of 0:03:05.320 --> 0:03:08.680 two thousand a, two thousand nine to think about whether 0:03:08.760 --> 0:03:14.280 there are different models that could be fundamentally safer. We 0:03:14.400 --> 0:03:16.640 essentially just put the you know, the sort of humpty 0:03:16.720 --> 0:03:22.480 dumpty and put it all back together again. Yeah, pretty much. Anyway. 0:03:22.520 --> 0:03:25.640 I bring that up because our guest today, I think 0:03:26.000 --> 0:03:30.160 is is someone who is trying to still push forward 0:03:30.280 --> 0:03:33.400 with a different model of banking. And we're going to 0:03:33.480 --> 0:03:38.440 be talking to Jamie mc andrews. He was a longtime 0:03:38.520 --> 0:03:41.360 veteran of the New York FED and he is the 0:03:41.440 --> 0:03:45.400 founder and CEO of what he hoped will be a 0:03:45.440 --> 0:03:49.360 new type of bank that is much safer for retail 0:03:49.480 --> 0:03:54.720 customers than any currently existing bank. Right. So I'm really 0:03:54.720 --> 0:03:59.120 excited about this conversation because this idea comes up every 0:03:59.200 --> 0:04:01.720 once in a while. As you say, it hasn't really 0:04:01.760 --> 0:04:04.880 gotten much traction just yet. But the notion of a 0:04:05.560 --> 0:04:10.200 narrow banking or full reserve banking, or it's sometimes called 0:04:10.240 --> 0:04:13.840 the Chicago Plan, I think it's a really interesting one, 0:04:14.080 --> 0:04:18.280 and this company is probably the one that's gotten furthest 0:04:18.400 --> 0:04:21.680 along with that idea, although as we're about to discuss, 0:04:22.120 --> 0:04:25.440 there have also been some roadblocks, right, so I don't 0:04:25.480 --> 0:04:28.080 want to get too into the business model of it 0:04:28.320 --> 0:04:31.120 before we bring Jamie on, because of course he'll describe 0:04:31.160 --> 0:04:35.440 it best himself. We should note at the outset of 0:04:35.480 --> 0:04:39.120 this that the bank, which is called the Narrow Bank, 0:04:39.160 --> 0:04:41.840 and we'll listeners will discover why, is not up and 0:04:41.920 --> 0:04:44.719 running yet it doesn't actually exist. It's still getting off 0:04:44.760 --> 0:04:49.680 the ground, and there's currently a lawsuit happening. Narrow Bank 0:04:49.839 --> 0:04:54.360 is suing essentially to have the right to exist currently 0:04:54.400 --> 0:04:57.640 it hasn't been approved to exist, and we can't really 0:04:57.680 --> 0:05:01.360 get into the details of the lawsuit too much because 0:05:01.360 --> 0:05:04.960 it's ongoing. But in our just in our conversation, listeners 0:05:05.000 --> 0:05:07.440 will discover what the goal of the Narrow Bank is 0:05:07.920 --> 0:05:11.520 and the sort of opportunities that it presents as a 0:05:11.560 --> 0:05:14.560 safer model of banking. Yeah, it's going to be good. 0:05:14.880 --> 0:05:17.919 All right, let's bring in Jamie. So Jamie mc andrews. 0:05:17.920 --> 0:05:21.000 Thank thank you very much for joining us. Thanks Joe 0:05:21.040 --> 0:05:23.680 and Tracy. It's it's great to be on odd Lots. 0:05:23.680 --> 0:05:26.400 Thank you. So, what do you describe what the Narrow 0:05:26.400 --> 0:05:31.480 Bank is? Okay, I'll be happy to and just to there. 0:05:31.480 --> 0:05:33.440 There are a couple of things you said in your 0:05:33.480 --> 0:05:38.040 intro that I'd like to clarify. The Narrow Bank does exist. 0:05:38.760 --> 0:05:42.640 It has received what's called it's temporary certificate of authority 0:05:42.680 --> 0:05:45.240 from the Department of Banking in Connecticut, so it's a 0:05:45.360 --> 0:05:50.279 chartered state bank. The dispute with the Federals or Bank 0:05:50.400 --> 0:05:55.320 New York is not about its UH regulatory status or anything. 0:05:55.440 --> 0:05:58.600 It's about whether the Federers or Bank of New York 0:05:58.920 --> 0:06:04.119 will provide TND with an account. So we're simply looking 0:06:04.160 --> 0:06:07.360 for account services from the Felt Reserve, not any regulatory 0:06:07.800 --> 0:06:10.680 approval of any sort. And the other thing is T 0:06:10.920 --> 0:06:17.760 and B is not ensured by the Federal Deposit Insurance Corporations, 0:06:17.800 --> 0:06:21.200 so it won't be dealing directly with retail customers. It's 0:06:21.240 --> 0:06:25.000 it's for institutional investors and so it's just those are 0:06:25.000 --> 0:06:27.840 just a couple, since I wanted to make sure your 0:06:27.880 --> 0:06:32.599 listeners understood. But yes, getting back to the basic question, 0:06:32.640 --> 0:06:35.760 what is t n B. T and B is designed 0:06:36.000 --> 0:06:44.159 to provide institutional investors with very high, are competitive, but 0:06:44.440 --> 0:06:52.040 safe deposit rates. It's specifically designed to perform this function 0:06:52.160 --> 0:06:58.359 because what we've seen since the crisis is that the 0:06:58.520 --> 0:07:02.800 interest on reserves that the FED pays to banks has 0:07:02.839 --> 0:07:07.880 not been passed through very well to bank customers, bank depositors. 0:07:08.760 --> 0:07:13.280 And we designed, my colleagues and I have founded TMB 0:07:13.480 --> 0:07:20.800 designed the bank two perform this specific service, and its 0:07:21.240 --> 0:07:26.760 design features are intended exactly to to get higher deposit 0:07:26.840 --> 0:07:32.280 rates safely two institutional investors. So Jamie, could you maybe 0:07:32.600 --> 0:07:36.880 in a nutshell describe how traditional banking actually works because 0:07:36.880 --> 0:07:39.320 I think that's going to help our listeners kind of 0:07:39.400 --> 0:07:43.760 understand what's different about your bank. So, you know, the 0:07:43.760 --> 0:07:46.400 commercial banks, they get a bunch of interests that's paid 0:07:46.600 --> 0:07:48.840 on the reserves they have at the FED. I think 0:07:48.840 --> 0:07:54.520 it's currently like one point nine something percent. Why did 0:07:54.520 --> 0:07:57.840 they get paid that interest and why are they unable 0:07:57.880 --> 0:08:01.960 to pass most of it onto their customers? Right? Let 0:08:02.000 --> 0:08:05.800 me let me answer that in two steps First, how 0:08:05.840 --> 0:08:10.800 to ordinary banks work. Ordinary banks raise money by issuing 0:08:10.840 --> 0:08:15.720 deposits to customers, and so customers come in, they put 0:08:15.800 --> 0:08:19.600 money into the bank and receive a claim on the bank, 0:08:19.640 --> 0:08:22.720 which is called a deposit, and it's they're able to 0:08:22.760 --> 0:08:27.240 withdraw cents on the dollar at any time. That's the 0:08:27.320 --> 0:08:31.200 unique feature of deposits. And banks have capital as well 0:08:31.680 --> 0:08:36.640 from their founders and perhaps external investors. There's capital on 0:08:36.679 --> 0:08:40.040 the balance sheet, so typically the money in the bank 0:08:40.240 --> 0:08:45.200 comes from depositors and the equity from investors. On the 0:08:45.240 --> 0:08:48.320 other side of the balance sheet, banks keep some funds 0:08:48.440 --> 0:08:51.360 in what are called reserve deposits, and those are usually 0:08:51.400 --> 0:08:53.480 at the central bank or they can take the form 0:08:53.559 --> 0:08:59.200 of currency and evolved and those allow the bank to 0:09:00.000 --> 0:09:05.439 honor their depositors withdrawal requests very quickly, and with other investments, 0:09:05.480 --> 0:09:09.040 the bank makes loans to households and businesses. So that's 0:09:09.080 --> 0:09:14.679 a typical bank. And so in the conventional bank there's 0:09:14.720 --> 0:09:17.520 only a fraction of their deposits that are held in 0:09:17.600 --> 0:09:25.559 these reserves. And consequently banks have a instability built into them, 0:09:25.559 --> 0:09:29.200 which is that if all depositors withdraw their funds at 0:09:29.240 --> 0:09:33.280 the same time, the bank may have difficulty sourcing enough 0:09:33.360 --> 0:09:37.600 reserves to honor all their depositors withdraw all requests. That 0:09:37.640 --> 0:09:40.439 would be a run on the bank. And if they 0:09:40.440 --> 0:09:43.800 can't borrow against the loans that they've made, they would 0:09:43.840 --> 0:09:52.800 be in difficulty. Now, historically, the Federal Reserve, throughout its 0:09:52.880 --> 0:09:57.359 history has not paid any interest on reserves. The deposits 0:09:57.400 --> 0:10:00.640 of the Federal Reserve were non interest sparing. But in 0:10:00.679 --> 0:10:04.160 two thousand six, the Congress of the United States authorized 0:10:04.160 --> 0:10:08.600 the Federal Reserve to pay interest on reserves. And the 0:10:08.600 --> 0:10:12.680 basic idea behind this was that the Federal Reserve was 0:10:12.840 --> 0:10:17.280 requiring banks to hold reserves and they weren't paying any 0:10:17.320 --> 0:10:20.520 interest on the reserves. So that can be considered the 0:10:20.600 --> 0:10:24.480 type of tax because it was required for the people 0:10:24.520 --> 0:10:26.800 to hold it and they didn't earn any money on it. 0:10:27.320 --> 0:10:30.120 Of course, the Federal Reserve could invest those funds in 0:10:30.760 --> 0:10:35.280 government securities and earn money on it. So the lost 0:10:35.360 --> 0:10:39.920 earnings that people suffered by holding required reserves is the 0:10:40.000 --> 0:10:43.720 type of tax. So Congress agreed with the Federal Reserve 0:10:44.160 --> 0:10:47.760 and the banking industry that there should be payment of 0:10:47.880 --> 0:10:53.319 interest on reserves, just like banks pay interest on deposits, 0:10:53.440 --> 0:11:00.040 and that authority was granted in two thousand six. It 0:11:00.040 --> 0:11:02.640 it was first used in two thousand eight in October 0:11:02.679 --> 0:11:05.719 two thousand eight, where the Federal Reserves paid interest on reserves. 0:11:06.720 --> 0:11:10.319 The other aspect of paying interest on reserves is it's 0:11:10.360 --> 0:11:13.640 a way to for the Federal Reserve to implement its 0:11:13.640 --> 0:11:20.200 monetary policy. It's interest rate target. Again, prior to the 0:11:20.240 --> 0:11:22.520 financial crisis and prior to two thousand and eight, the 0:11:22.520 --> 0:11:27.880 Federal Reserve affected the money market interest rates, the rates 0:11:27.920 --> 0:11:30.320 for example that banks lend to one another called the 0:11:30.320 --> 0:11:36.880 Federal funds rate, by affecting the supply of reserves in 0:11:36.920 --> 0:11:39.960 the market. So if they provide a lot of reserves 0:11:40.000 --> 0:11:43.480 to banks, many banks would have excess reserves and wish 0:11:43.559 --> 0:11:46.480 to lend in that market. That would drive the overnight 0:11:46.840 --> 0:11:51.240 rate down. And on the other hand, if they put 0:11:51.320 --> 0:11:54.240 only few reserves in the market and had a scarcity, 0:11:54.600 --> 0:11:56.920 there would be very few lenders of reserves and other 0:11:56.960 --> 0:11:59.400 banks would be short of reserves and that would drive 0:11:59.480 --> 0:12:03.440 the overnight interest rate up. But with the financial crisis, 0:12:03.480 --> 0:12:07.280 the Federal Reserve had many excess reserves in the market 0:12:07.880 --> 0:12:12.000 and so the interest rate would be zero on those 0:12:12.600 --> 0:12:16.400 except for the fact that the Federal reserve achieved the 0:12:16.440 --> 0:12:19.840 ability to pay interest on them. Once they were paying 0:12:19.920 --> 0:12:23.040 interest on reserves, then banks had a new source of 0:12:23.120 --> 0:12:27.920 demand for reserves because the reserves would earn this interest rate, 0:12:28.120 --> 0:12:31.840 and so banks, theoretically in a competitive market, would be 0:12:31.880 --> 0:12:36.160 happy to pay depositors to put funds into their bank 0:12:37.080 --> 0:12:41.360 and then earn the interest at the Federal Reserve. That 0:12:41.360 --> 0:12:44.560 would tend to drive deposit rates and overnight interest rates 0:12:44.679 --> 0:12:48.280 up towards the interest on access reserves. So it's become 0:12:48.280 --> 0:12:52.600 a monetary policy tool in the wake of the very 0:12:52.679 --> 0:12:56.200 large levels of reserves that the FIT has held, that 0:12:56.240 --> 0:13:00.480 the FED has created since the crisis. So I'm mentioned 0:13:00.520 --> 0:13:04.640 at the beginning that you, prior to having founded the 0:13:04.800 --> 0:13:08.400 Narrow Bank, you were at the New York Federal Reserve, 0:13:09.160 --> 0:13:11.559 and this idea of launching a new bank, if I've 0:13:12.000 --> 0:13:16.160 read properly, came out of research that you did while 0:13:16.280 --> 0:13:19.920 at the New York Fed about essentially this question, which 0:13:20.000 --> 0:13:26.320 is why aren't depositors at retail facing banks getting higher 0:13:26.440 --> 0:13:29.720 rates when the banks are able to collect higher rates 0:13:29.800 --> 0:13:34.959 from their reserves. That's that's about right, Joe. The there 0:13:35.040 --> 0:13:39.240 was a lot of concern um throughout the whole financial 0:13:39.280 --> 0:13:42.600 system that after two thousand eight, when banks were earning 0:13:42.640 --> 0:13:48.800 interest on reserves, the overnight rate was not very close 0:13:48.800 --> 0:13:51.520 to the interest on reserves. It was lying well below 0:13:51.559 --> 0:13:54.400 the interston reserves ten or fifteen basis points are a 0:13:54.480 --> 0:13:57.000 tenth more than a tenth of a percent, which is 0:13:57.160 --> 0:14:01.120 prisingly large amount. Things are little bit better today, but 0:14:01.240 --> 0:14:05.560 for several years the banks were paying rates on overnight 0:14:05.679 --> 0:14:09.840 funds that were very low compared to what they could 0:14:09.840 --> 0:14:13.079 earn on reserves, and it was a puzzle for economists 0:14:13.240 --> 0:14:21.840 to determine why isn't the competition for large deposits driving 0:14:21.840 --> 0:14:25.240 the interest rate up towards the interest on reserves, And 0:14:25.280 --> 0:14:31.440 there have been several economic explanations for that. Darryl Duffy 0:14:32.040 --> 0:14:36.960 and colleagues have explained that there's the market for UH 0:14:37.080 --> 0:14:41.640 federal funds and other overnight loans is the search um model. 0:14:41.640 --> 0:14:43.640 It's and over the counter market where people have to 0:14:43.640 --> 0:14:47.280 go out and find a counterparty, and that is less 0:14:47.280 --> 0:14:51.560 than perfect competition. With colleagues, I did research that pointed 0:14:51.560 --> 0:14:57.240 out that there's monitoring and credit exposure risks and for 0:14:57.280 --> 0:15:01.760 that reason, lenders one to expose themselves only to a 0:15:01.760 --> 0:15:05.880 few banks, and that grants those banks essentially a monopsony 0:15:05.960 --> 0:15:11.200 power over the lenders, and Morton Beck can bethically have 0:15:11.280 --> 0:15:14.440 another theory having to do with the bargaining. The nature 0:15:14.440 --> 0:15:18.280 of the bargaining between two parties over time leads to 0:15:18.920 --> 0:15:22.680 less than perfect competition. So it was recognized that there 0:15:22.760 --> 0:15:27.359 was less than perfect competition for these large deposits to banks, 0:15:27.480 --> 0:15:30.480 and so the Federal Reserve undertook a lot of work 0:15:30.560 --> 0:15:38.920 to improve the competition in the market. Ultimately, the Federal 0:15:39.000 --> 0:15:44.000 Reserve chose to create its own narrow bank, you might say, 0:15:44.080 --> 0:15:48.400 the overnight reverse from Purchase Agreement facility that serves about 0:15:48.440 --> 0:15:51.760 a hundred and sixty non banks. It's designed as a 0:15:52.800 --> 0:15:56.280 open market operation, and it legally fits that description, but 0:15:56.720 --> 0:16:01.080 it was designed to the economically element to an account. 0:16:01.800 --> 0:16:05.760 Essentially that these hundred and sixty money market mutual funds, 0:16:05.840 --> 0:16:12.200 broker dealers, federal home loan banks can deposit money at 0:16:12.200 --> 0:16:17.320 the Federal Reserve overnight and receive an interest rate the 0:16:17.520 --> 0:16:23.400 It's designed as a as a repo transaction, but the 0:16:23.440 --> 0:16:27.880 proffering of this collateral really doesn't improve the credit quality 0:16:28.040 --> 0:16:32.000 that the participants in that facility received because the Federal 0:16:32.000 --> 0:16:39.359 Reserve Bank is already extremely highly credit worthy, and the 0:16:39.400 --> 0:16:44.160 participants don't rehapomplicate the securities in the in the program. 0:16:44.240 --> 0:16:48.320 So it's essentially an account that those people, those those 0:16:48.400 --> 0:16:51.520 hundred and sixty institutions have at the Federal Reserve. And 0:16:51.560 --> 0:16:56.120 that was the way that the FED was able to 0:16:56.240 --> 0:16:59.440 narrow the range of interest rates overnight so that those 0:16:59.680 --> 0:17:04.320 large participants in the money market would surely be able 0:17:04.359 --> 0:17:07.159 to enjoy an interest rate at least as high as 0:17:07.200 --> 0:17:09.439 what the FED was paying, and they could go to 0:17:09.480 --> 0:17:13.440 their private counterparties and say, hey, I'm getting this interest 0:17:13.520 --> 0:17:15.639 rate at the Fed. You have to pay me more 0:17:15.880 --> 0:17:21.520 if you'd like my lending into into your institution. And 0:17:21.760 --> 0:17:24.440 that has um from the feeds point of view. There's 0:17:24.440 --> 0:17:26.600 a lot of work on that that has been uh 0:17:26.880 --> 0:17:31.280 successful in the sense that the overnight interest rate has 0:17:31.320 --> 0:17:35.919 remained above that level in the that they pay in 0:17:35.960 --> 0:17:40.919 the overnight reverse repurchase agreement facility. Right, So we're talking 0:17:40.920 --> 0:17:43.760 about a couple of things here. One of them is 0:17:43.800 --> 0:17:46.960 how commercial banks operate. One of them is how money 0:17:46.960 --> 0:17:49.320 market funds operate, and the other one is how they 0:17:49.359 --> 0:17:52.359 all sort of interconnect with the Federal Reserve and the 0:17:52.359 --> 0:17:57.800 FEDS monetary policy. Where would the narrow bank sit in 0:17:57.880 --> 0:18:02.320 that ecosystem and what would its relationship be like with 0:18:02.520 --> 0:18:07.040 the Fed? And UM, I guess large institutional depositors because 0:18:07.160 --> 0:18:11.440 you said you're not really targeting retail, that's right. So 0:18:12.680 --> 0:18:16.600 my colleagues and I at TNB have felt that there 0:18:16.680 --> 0:18:22.960 was a market opportunity to create a special purpose um 0:18:23.160 --> 0:18:26.840 ultra safe, low cost and focus competitor to inner that 0:18:27.760 --> 0:18:33.440 market for large deposits. And we asked ourselves what would 0:18:33.520 --> 0:18:37.040 be required to enter that market because we're hoping to 0:18:37.800 --> 0:18:41.720 attract very large deposits. And the first answer that we 0:18:41.840 --> 0:18:45.600 came to is the bank would have to be very 0:18:45.760 --> 0:18:49.760 very safe because we're competing with the largest banks in 0:18:49.800 --> 0:18:53.040 the world, many of whom are perceived to be too 0:18:53.040 --> 0:18:57.240 big to fail. So in other words, those banks are 0:18:57.280 --> 0:19:01.240 considered to have a government guaranteed by by many depositors. 0:19:02.240 --> 0:19:06.879 And so the only way to create a DiNovo bank 0:19:07.480 --> 0:19:12.160 that is very very safe is to designed the bank 0:19:12.240 --> 0:19:17.640 on a hundred reserve basis, and that is possible now 0:19:18.240 --> 0:19:23.320 in contrast to back in historical times, because reserves pay interest. 0:19:24.160 --> 0:19:28.240 And so it was the change by the Congress in 0:19:28.320 --> 0:19:30.359 two thousand and six that allow the fellow reserved to 0:19:30.400 --> 0:19:35.560 pay interest. That created this market opportunity. A bank could 0:19:35.640 --> 0:19:40.640 be designed on a hundred percent reserve basis and there 0:19:40.680 --> 0:19:43.000 therefore would be extremely safe and it would have the 0:19:43.040 --> 0:19:47.960 hope of attracting depositors. And then because it was a 0:19:48.359 --> 0:19:52.320 percent reserves, it would be a very low cost bank 0:19:52.400 --> 0:19:56.119 in terms of operating costs. The assets carry no financial risks, 0:19:57.160 --> 0:20:00.480 costly insurance from the fdi C is not needed, and 0:20:00.680 --> 0:20:04.800 so the bank would be a low cost competitor in 0:20:04.880 --> 0:20:08.800 that market. It's important to note that foreign banking organizations 0:20:08.800 --> 0:20:13.040 that take in wholesale deposits also do not carry the 0:20:13.080 --> 0:20:16.480 insurance of the fdi C, so in essence, the bank 0:20:16.600 --> 0:20:21.600 had to match that competition. But by designing the bank 0:20:22.240 --> 0:20:27.280 this way, then we would have a low cost operation 0:20:27.440 --> 0:20:30.840 that could pass on the interest on reserves earned from 0:20:30.840 --> 0:20:34.560 the federal reserve to large institutional depositors. And we thought 0:20:34.640 --> 0:20:38.240 that would be a market opportunity that would be able 0:20:38.280 --> 0:20:41.520 to compete with those very largest banks in the nation 0:20:41.560 --> 0:20:44.600 who enjoy the ability to attract deposits at very low 0:20:44.720 --> 0:20:47.680 rates because of their perceived safety. I think this is 0:20:47.760 --> 0:20:50.440 really the key thing here that we've got to which 0:20:50.480 --> 0:20:52.400 is your business model, And I just want to make 0:20:52.440 --> 0:20:57.080 sure people understand it. If right now I'm an institution, 0:20:57.480 --> 0:21:01.040 and let's say I have, uh, you know, a bunch 0:21:01.080 --> 0:21:03.359 of money, ten million dollars in cash I want to 0:21:03.480 --> 0:21:07.439 put somewhere right now, I would probably go to some big, 0:21:07.480 --> 0:21:11.840 two big to fail bank, and their assets would be 0:21:11.880 --> 0:21:15.239 a mix of things including, uh, some things that are 0:21:15.320 --> 0:21:18.520 very safe and other things which are riskier. And they 0:21:18.520 --> 0:21:21.800 wouldn't feel particularly compelled to pass on a competitive rate 0:21:21.840 --> 0:21:24.080 to me because they know I don't have any options, 0:21:24.200 --> 0:21:26.960 and I would just be choosing from other too big 0:21:27.000 --> 0:21:30.520 to fail banks. But your argument is you can create 0:21:30.560 --> 0:21:34.280 the safest possible bank in the world. Because I give 0:21:34.320 --> 0:21:37.840 you my ten million dollars I deposited with you. You 0:21:37.880 --> 0:21:41.359 will automatically that turns into ten million dollars worth of 0:21:41.400 --> 0:21:44.080 assets for you, because you put that ten million dollars 0:21:44.760 --> 0:21:47.439 in a FED account and that's the safest money in 0:21:47.480 --> 0:21:50.000 the world. And you don't have any other costs because 0:21:50.000 --> 0:21:52.679 you don't have a bunch of loan officers and credit 0:21:52.720 --> 0:21:55.400 people because that's not your business, and you don't have 0:21:55.440 --> 0:21:58.200 the fdi C fees, and you just pass that straight 0:21:58.240 --> 0:22:00.640 onto me. And even though you're not un too big 0:22:00.640 --> 0:22:02.720 to fail, I don't have to worry about any of 0:22:02.760 --> 0:22:05.760 your asset quality because it's the highest quality money in 0:22:05.800 --> 0:22:12.520 the world. Weld Joe. That's that's a good description. So, um, 0:22:12.560 --> 0:22:15.800 how does that differ from a money market fund, Because, 0:22:15.840 --> 0:22:19.800 of course, if I am a large institutional customer, one 0:22:19.800 --> 0:22:21.080 of the things that I would do if I have 0:22:21.119 --> 0:22:23.480 a bunch of extra money is maybe park it in 0:22:23.560 --> 0:22:26.920 a fund that invests in things that are usually considered 0:22:27.400 --> 0:22:31.040 quite safe, like US treasuries or commercial paper or something 0:22:31.080 --> 0:22:36.000 like that. So how is this difference. Well, for the 0:22:36.040 --> 0:22:41.800 government only funds, H. Tracy, I think you're. I think you're. 0:22:44.200 --> 0:22:47.879 There is a lot of similarity between the two types 0:22:47.920 --> 0:22:52.760 of institutions. Some of the differences are the TNB has capital, 0:22:53.320 --> 0:22:59.840 and it will have capital to help support the re 0:23:00.080 --> 0:23:05.439 payment of depositors claims. Money market mutual funds don't have 0:23:05.480 --> 0:23:08.679 any capital. The second thing is the nature of the 0:23:08.760 --> 0:23:11.639 assets that are being invested in by the two types 0:23:11.680 --> 0:23:16.080 of institutions. Government only money market funds invest in US 0:23:16.119 --> 0:23:21.080 obligations T and B will invest in Federal Reserve deposits. 0:23:21.160 --> 0:23:25.439 There's a difference in the liquidity of those two types 0:23:25.480 --> 0:23:29.600 of assets. There are bid ask spreads, and there's maturity 0:23:29.960 --> 0:23:34.000 transformation that's going on in money market mutual funds. Of course, 0:23:34.040 --> 0:23:40.280 that maturity transformation caused extraordinary problems, as you pointed out 0:23:40.280 --> 0:23:43.679 at the outset of your of this podcast, when the 0:23:43.720 --> 0:23:46.960 Reserve Primary Fund, which was was a prime fund not 0:23:47.040 --> 0:23:51.560 a government only fund, um broke the buck because they 0:23:51.560 --> 0:23:56.360 were engaging in both credit and maturity transformation. Uh, there 0:23:56.440 --> 0:23:59.560 was a huge run on money market funds, showing the 0:24:00.560 --> 0:24:05.680 the fragility of that particular financial model. The narrow bank 0:24:06.000 --> 0:24:09.040 does not have that fragility because you can always meet 0:24:09.080 --> 0:24:14.040 its depositors demands, and even government only money market funds 0:24:14.040 --> 0:24:17.840 engage in maturity transformation in order to boost the returns 0:24:17.920 --> 0:24:21.040 and that's a potential of fragility there. So T and 0:24:21.119 --> 0:24:25.080 B is simply a safer alternative. And because of the 0:24:25.080 --> 0:24:27.600 different assets, there are different interest rates that would be 0:24:27.760 --> 0:24:31.000 earned by, on the one hand, shareholders in the money 0:24:31.000 --> 0:24:35.840 market mutual fund and depositors at TNB, and it would 0:24:36.040 --> 0:24:38.720 depend on market conditions who had the higher interest rate. 0:24:39.119 --> 0:24:43.159 As we've seen recently, market conditions have changed in the 0:24:43.160 --> 0:24:47.120 money market. Many people believe it's the very large issuance 0:24:47.160 --> 0:24:49.840 of treasury bills by the U. S. Treasury. But in 0:24:49.960 --> 0:24:53.280 recent months, the treasury bill rate and the repo rate 0:24:53.320 --> 0:24:57.320 has moved up very close to the one that the 0:24:57.320 --> 0:25:03.160 subtle reserve is paying on uh it's on reserves. So 0:25:03.640 --> 0:25:08.800 UM market conditions have um, you know, moved somewhat against 0:25:08.920 --> 0:25:13.000 the narrowbank model. But we believe that there's a a 0:25:13.080 --> 0:25:16.840 business there. It may not be a huge business in 0:25:16.920 --> 0:25:20.639 present circumstances, but we believed could be an important component 0:25:20.800 --> 0:25:23.399 to the you know, to the financial system and I 0:25:23.520 --> 0:25:29.680 and a new and very safe alternative for institutional depositors. 0:25:29.720 --> 0:25:33.280 So I'm glad you said that about the business opportunity 0:25:33.320 --> 0:25:36.800 because that's exactly what I was going to ask you next. A. 0:25:37.560 --> 0:25:41.119 Have you estimated what how big of a business you 0:25:41.160 --> 0:25:44.600 think that it could be? And B. I don't want 0:25:44.600 --> 0:25:47.240 to phrase this in a way that might be sort 0:25:47.240 --> 0:25:50.719 of condescending or missing the points, but I am curious 0:25:50.760 --> 0:25:55.159 how much of this endeavor is about a business money 0:25:55.200 --> 0:25:59.600 making opportunity for you and your partners versus to some 0:26:00.040 --> 0:26:04.560 stent an implementation of an academic theory that's sort of 0:26:04.600 --> 0:26:09.280 a kind of a quasi academic project. Well, let me 0:26:09.320 --> 0:26:14.160 answer the the second question. First, this is a business opportunity. 0:26:14.880 --> 0:26:19.160 This is uh a very unique business opportunity and one 0:26:19.160 --> 0:26:23.520 that I think is inevitable given the payment of interest 0:26:23.560 --> 0:26:28.720 on reserves. I fully believe that narrow banks are something 0:26:29.680 --> 0:26:32.399 for the you know, for the future of our financial system, 0:26:32.440 --> 0:26:37.200 not not the past, not the sort of academic exercises 0:26:37.240 --> 0:26:39.679 that have been drawn on paper in the past. This 0:26:39.760 --> 0:26:43.280 is a living, breathing business opportunity that we believe is 0:26:43.480 --> 0:26:50.760 very important for depositors. And the reason again is the 0:26:50.760 --> 0:26:54.080 the see change that occurred in October two thousand eight 0:26:54.080 --> 0:26:56.760 when the subtle Reserve began paying interest on reserves. That's 0:26:56.800 --> 0:26:59.840 really a very important change in our financial system. But 0:27:00.280 --> 0:27:03.160 I don't believe even ten years later that it's been 0:27:03.160 --> 0:27:07.439 fully incorporated into the structure of the financial system. But 0:27:08.160 --> 0:27:14.119 let me um also distinguish T and B from the 0:27:14.359 --> 0:27:18.720 sort of historical plans and proposals for narrow banks. The 0:27:18.960 --> 0:27:22.720 famous example is the Chicago Plan, which was proposed in 0:27:22.760 --> 0:27:28.320