How the Narrow Bank, Inc. came to be
In 2015 a New York Fed economist coauthored a research paper on how to make interest rates in the wholesale market align with each other. James McAndrews and his co-authors argued that lack of competition in the fed funds market was preventing the gap between the fed funds rate and the interest rate the Fed paid to depositors (overnight reverse repurchase operations offer rate) from being arbitraged.
After resigning from the NY Fed, McAndrews co-founded the Narrow Bank (TNB) which does not make loans to businesses or write mortgages but instead accepts funds from depositors and passes these funds directly through to the Fed by redepositing them in its Fed master account. The Fed pays interest on these funds, which flow through TNB back to the original depositors, minus a fee for TNB.
“The Narrow Bank”
By: J.P. Koning – American Institute for Economic Research
The fragility of TNB’s business model
Overnight reverse repurchase operations have declined since the beginning of the year as market interest rates have increased both absolutely and relative to the Fed’s offer rate. This increase in interest rates has made the program both less attractive to potential participants and unnecessary as a means for establishing a lower-bound for the effective fed funds rate. With higher market rates will real deposit safety be enough for TNB to attract customers?
The Narrow Bank: A Follow-Up
By: George Selgin – University of Georgia
