|#2: FedNow Paranoia
|Banking industry analysts are worried about the impact that FedNow might have on bank deposits: The Federal Reserve expects to launch a new system this month aiming to make payments in the U.S. banking system available immediately, around the clock. Although it is a boon to consumers and many businesses, some analysts warn that FedNow could destabilize banks’ reliance on customer cash, fanning the flames of deposit flight that became the bane of several regional banks this spring.
instantaneous transactions allow customers to pull cash with ease, and without notice. That threatens smaller banks and likely requires stiffer cushions to mitigate adverse scenarios, according to [Noor] Menai, an advisory council member of the Federal Reserve Bank of San Francisco. Regulators are expected to propose tougher capital rules for the banking sector in the coming months. FedNow’s launch comes at a precarious time, during the Fed’s year-plus effort to raise interest rates and quell inflation. Banks are competing with money-market funds and other higher-yielding products for deposits, and paying up to borrow elsewhere. U.S. commercial-bank deposits were down $705 billion in June from a year ago.
|FedNow has become a magnet for lots of anxiety in and around the financial industry; everything from concerns about CBDCs to conspiracy theories about how it is part of a plot to destroy the crypto industry to these more mundane concerns about it accelerating the flight of deposits. None of it makes any sense to me. I guess I can see why it’s tempting to try (however illogically) to connect the dots, given the multifaceted role of the Federal Reserve (setting monetary policy, supervising banks, and providing payments infrastructure). But it still doesn’t make sense.
In this specific case, why would FedNow make the failures of banks like SVB and First Republic more likely? The introduction of mobile banking undoubtedly hurt banks’ deposit franchise values (read this paper on “Bank Walks” for a lot more detail), but that’s a function of convenience (the ability to chase rates or participate in a bank run from your couch) not speed (how fast the transaction clearance and settlement). And if you want to address the disparity between the speed at which bank customers can take money out and the speed at which banks can bring money in from external funding sources, the answer isn’t to hobble bank customers (though banks participating in FedNow will have flexibility in how they implement it). The answer is to modernize the Fed Discount Window and Federal Home Loan Bank system.