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What if you could bank with the Federal Reserve?


Key findings

  • Advocates say leaving individual members of the public bank at the Federal Reserve would solve several problems with the banking system.
  • Banking at the Fed will give the public access to better returns on deposits, faster money transfers, fewer fees and eliminate the possibility of banking crises, advocates say
  • Critics say the Fed’s public accounts would carry risks, including destroying existing banks

The collapse of Silicon Valley Bank in March inspired renewed calls to let people bank at the Federal Reserve — which advocates say could offer the public better interest rates, faster transactions, lower fees and greater confidence. that their money is safe.

The banking industry hates the idea.

How could it work

Here’s how it will work, as outlined in a Roosevelt Institute publication on public banking, which calls this type of bank account FedAccounts. Individuals and businesses can deposit their money at the Federal Reserve – only banks and government agencies can do this now. Depositors could do business in person at post offices, by phone or online with the help of an army of customer service representatives the Fed would have to hire.

Those with FedAccounts will gain access to the Fed’s payment network, allowing instant electronic money transfers, and will be paid the same interest rate that banks currently receive on their central bank deposits, which is much higher than what banks usually offer.

A debate from both sides

For proponents of public banking, the latest banking crisis highlighted how vulnerable the financial system is to repeated shocks and panics that often threaten to spill over and damage the broader economy, and bolstered the case for Fed bank accounts as a solution. The current financial system repels the proposal at every turn.

A spokesman for the American Bankers Association, a trade group representing banks, called FedAccounts “a solution in search of a problem” and said it would reduce consumer choice for financial services. In fact, Fed bank accounts would be such a good deal for depositors that private banks wouldn’t be able to compete, the ABA argued in a 2021 rebuttal to the FedAccount proposal.

“There is no evidence that the current market is failing to meet the nation’s banking needs,” the ABA spokesman said in an email. “Government intervention in our private banking system will unnecessarily put taxpayers at risk and reduce choices for Americans.”

One leading public banking advocate paid a political price for his advocacy. Saule Omarova, a Cornell law professor and outspoken critic of big banks, was nominated in 2021 by President Joe Biden to be the top bank regulator and has come under fire from conservatives for her own idea of ​​public banking with the Fed, a plan called “ The People’s Book.”

Senator Pat Toomey, Republican of Pennsylvania, called her proposals radical and highlighted her upbringing in the then-Soviet republic of Kazakhstan to accuse her of being a communist. Omarova, whose capitalist credentials include an early career spent at major Wall Street law firm Davis, Polk, & Wardwell, denied the allegations but was forced to withdraw from consideration for the post.

Still, Omarova is among the standard-bearers of the latest push for public banking. She wrote an op-ed in the Washington Post last month touting FedAccounts as a way to protect the public from bank failures and eliminate the need for the government to step in and bail out the banking system again in the future.

The FedAccounts plan was developed by Vanderbilt law professor and banking reform advocate Morgan Ricks and Columbia University law professor Lev Menand — both former Obama administration officials — and UC San Francisco law professor John Crawford in 2018. It was published by the Roosevelt Institute, a progressive think tank where Omarova is now a fellow. In 2020, Senator Sherrod Brown, D-Ohio, introduced a bill to make FedAccounts a reality to help the government more effectively allocate pandemic relief funds. (The Banking for All Act never made it out of the Senate Banking Committee.)

Recently, the architects of FedAccounts, along with proponents of various other public banking proposals, have taken their case to the financial media in articles in Bloomberg, Yahoo Finance, Marketplace and others, arguing that the time is right to revisit the idea, which proponents say is letting people put their money in the Federal Reserve would make money management faster and more efficient than the current system, and would give people who are currently unbanked access to financial services without predatory fees imposed by companies like check providers.

What the lawyers hope he will do

Currently, only banks and government agencies can deposit money at the Fed. By law, the central bank is not allowed to offer banking services to individuals. Here’s what advocates say would happen if it were repealed and you were allowed to bank at the Fed, arguably the safest financial institution in the world:

You can bank at the post office instead of a bank branch

Instead of visiting your local bank branch, you can deposit, withdraw and transfer money at your local post office or online. ATMs and other infrastructure will be installed in existing postal facilities. This aspect of the plan harkens back to an earlier era—the Post Office actually offered basic banking services between 1911 and 1967.

You will get more interest on your deposits

Money held in your FedAccount will earn interest at a rate set directly by the Federal Reserve, which currently only commercial banks can earn. As of Wednesday, it was 4.90%. Compare that to the 0.39 percent interest rate that banks typically offer for savings accounts as of April, according to FDIC data.

The Federal Reserve will turn around and borrow banks’ money through an extended version of its “discount window,” Omarova explained in her commentary — which would preserve the banks’ existing role as lenders and allow the central bank to give preference to certain types of borrowers , such as small businesses or underserved communities.

You won’t have to pay any fees

Your Fed bank account will not charge you any hidden fees for the banking services they provide, and there will be no minimum balance requirements. Plus, you’ll never be saddled with overdraft fees – although you’ll never be able to overdraw your bank account if you need to.

Advocates say it would make banking more accessible to the roughly 20 percent of U.S. adults who are currently unbanked or underbanked and who often turn to expensive alternatives like pawn shops and cashiers for basic services.

The banking system could be more stable

The banking system will be less susceptible to crises like the bank run that brought down Silicon Valley Bank, advocates say.

“FedAccount will virtually eliminate the threat of bank runs because accounts held at the central bank will be fully protected, regardless of size,” said Emily DeVito, senior program manager of corporate power at the Roosevelt Institute.

De Vito acknowledged that things had calmed down after the initial wave of turmoil rocked financial markets following the collapse of SVB, but said the episode still showed the need for FedAccounts.

“It’s good that we’ve seemingly stabilized after this really sharp moment of panic, but the fact that this happened shows some problems in the system that we need to address in times of relative stability to prevent future chaos and not wait for to happen again in the future,” she said.

After DeVito’s interview, the bankruptcy of San Francisco-based First Republic Bank highlighted continued instability in the financial system.

The bottom row

There are no current bills being debated in Congress and no active plans to change the law that prevents citizens from banking with the Federal Reserve. But if the law changes, there is no doubt that it will have a huge impact on the banking system as we know it.

Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.