Golden Ticket or Bad Egg? The Case of the Narrow Bank

By Dawn Causey, Thomas Pinder and Andrew Doersam

In the film Willy Wonka and the Chocolate Factory, the tour of Wonka’s incredible and eccentric factory includes a stop in the Egg Room—where Wonka shows his guests the geese that can lay golden eggs, and where bratty Veruca Salt makes a mess of the room as she sings “I Want It Now.” As Veruca sits on a scale that can distinguish a “good egg” from a “bad egg,” the last words she says before falling down the chute are: “Don’t care how, I want it now!”

In some ways, Veruca’s last words perfectly capture the sentiment of a complaint filed last summer against the Federal Reserve. In TNB USA, Inc. v. Federal Reserve Bank of New York, a provisionally chartered, uninsured state bank filed a complaint to force the Federal Reserve to provide the bank a master account at the Federal Reserve Bank of New York.

TNB stands for “The Narrow Bank,” which describes its business strategy as “providing ultra-safe depository services for institutional money market investors.” TNB’s plan is to hold 100 percent of its assets derived from customer deposits as Federal Reserve Bank balances, earning interest at the “interest on excess reserves” rate. TNB will not seek FDIC insurance, because TNB’s customer base will be limited to large institutional money market investors.

In August 2017, Connecticut granted TNB authority to open as an “uninsured bank,” but conditioned that approval on TNB receiving a master account at the Federal Reserve. Obtaining a master account is typically a quick and routine matter. However, the Fed’s review of TNB’s application has been particularly lengthy. The Fed is concerned that the TNB business model could undermine the Fed’s use of IOER, a key tool in monetary policy transmission. As of this writing, the New York Fed has not acted on the TNB application it received in August 2017.

TNB’s complaint seeks to force the Fed to grant its application. As legal support, TNB cites Section 11A of the Federal Reserve Act, which requires the New York Fed to make services available on an equal, non-discriminatory basis to all qualified depository institutions. TNB argues that a master account is a prerequisite to all Federal Reserve Bank services, and without a master account, it simply cannot not have equal access to services. TNB likens this situation to having “the right to play tennis without the right to a racket.”

In opposition, the New York Fed argues that TNB lacks standing and cannot have a ripe claim while the Federal Reserve’s review process is pending. FRBNY also relies on Section 13 of the FRA, which provides that “any Federal reserve bank may receive from any of its member banks, or other depository institutions, deposits of current funds in lawful money.” To the Fed, Section 13 is clear as day: although Federal Reserve Banks have the authority to accept deposits—and thus to open master accounts—the FRA does not require that they do so.

Finally, the New York Fed argues that TNB’s interpretation of Section 11A would create an impermissible conflict with the FRA’s statutory scheme, since providing TNB an account would interfere with the Fed’s ability to carry out other statutory policy mandates, regarding monetary policy and financial stability.

TNB thinks its business model is like winning a golden ticket. But, in reality, the benefits that TNB offers its institutional investor client base would be more than offset by the harm it does to the banking system and the Fed’s use of IOER. Stay tuned for a follow-up article after the district court issues its ruling.

Dawn Causey is general counsel at ABA, where Thomas Pinder is deputy general counsel and Andrew Doersam is a paralegal.