ABA Supports Fed Approach on ‘Narrow Bank’ Issue

The American Bankers Association today expressed its support for the Federal Reserve’s proposed approach toward so-called narrow banks. Paying less interest on the excess reserve balances of these institutions, as the Fed has suggested, would address risks posed by narrow banks to monetary policy, credit availability and financial stability, ABA said.

The association agreed with the Fed that narrow banks—which the Fed calls “pass-through investment entities,” or PTIEs—could compromise the Fed’s ability to conduct monetary policy by interrupting the transmission of IOER and Overnight Reverse Repurchase Agreement Facility rates to the federal funds rate. ABA cautioned that a shift in deposits away from commercial banks could substantially reduce funding for loans, and that in times of financial stress, PTIEs could be procyclical in draining liquidity from the banking system. ABA also provided feedback to the Fed on defining PTIEs in a way that does not capture de novo banks, bankers’ and correspondent banks and trust companies.

The Fed in March sought public comment on whether it should reduce the rate of interest paid on excess reserves for PTIEs, whose business model 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. For more information, contact ABA’s Cecelia Calaby.