Gold Silver Reports (GSR) — A former Federal Reserve official is suing the Fed for blocking his plan to create a new kind of bank, saying it is putting the interests of big Wall Street banks ahead of their large customers.
The lawsuit, filed in federal court last week, accuses the Fed chairman, Jerome H. Powell, of preventing the new bank, known as TNB USA, from operating. James McAndrews, who filed the lawsuit, asserts Mr. Powell directed Fed staffers to withhold permission for his bank to open an account at the Federal Reserve Bank of New York — a necessary precursor for TNB USA to open its doors.
“We are aware of the lawsuit and we are reviewing it,” a Fed spokeswoman said.
TNB USA would function quite differently from existing banks. It would not make any loans. Instead, it would put all of its customer deposits into an account at the New York Fed.
The bank is seeking to take advantage of a space that the Fed created in 2015 when it overhauled the mechanics of monetary policy. Before the 2008 financial crisis, when the Fed wanted to slow economic growth, it drained money from the financial system. Now, instead of removing money from the system, the Fed seeks to immobilize money by paying banks to maintain deposits at the Federal Reserve.
The Fed pays banks a rate of 1.95 percent on those deposits; the banks then pay a lower rate on the money they collect from customers, like large institutional investors. To limit the banks’ profit margin, the Fed also offers to pay a somewhat lower rate, currently 1.75 percent, directly to non-banks.
TNB USA would pay a rate between 1.75 percent and 1.95 percent on large deposits from institutions like mutual funds, putting pressure on other banks to increase rates for those customers.
“What you want is a good competitor that will pay the interest on reserves to depositors so that all of the rent doesn’t get soaked up by the banks, which is what’s happening right now,” Mr. McAndrews said Thursday.
Mr. McAndrews contributed to the creation of the current system as head of research at the New York Fed between 2010 and 2016. He left the Fed in 2016 and obtained a banking charter from Connecticut the next year. In August 2017, TNB USA applied for an account at the New York Fed. – Neal Bhai Reports (NBR)
