Fed Floats Rule Change Targeting ‘Narrow Bank’ Concept

The Federal Reserve today sought public comment on whether it should reduce the rate of interest paid on excess reserves for banks with a so-called “narrow” model that involves holding a large proportion of its assets on reserve at the Fed. Specifically, the Fed floated an approach of paying zero interest on the the excess balances of these institutions.

The advance notice of proposed rulemaking appeared to take aim at the narrow bank model, which involves taking deposits from institutional investors and holding virtually all of them at the Federal Reserve Banks — and passing on the IOER rate to depositors, less a small spread to cover operational expenses. The New York Fed has not approved the membership application of a narrow banking firm called TNB; that matter is currently in litigation.

“The Board is concerned that [pass-through investment entities], by maintaining all or substantially all of their assets in the form of balances at Reserve Banks and having the ability to attract very large quantities of deposits at a near-IOER rate, have the potential to complicate the implementation of monetary policy,” the Fed said. In addition, the Board is concerned that PTIEs could disrupt financial intermediation in ways that are hard to anticipate, and could also have a negative effect on financial stability.” Comments on the ANPR are due 60 days after it is published in the Federal Register.