Why won't banks take your money?

 Banks to Companies: No More Deposits, Please, says the puzzling headline at WSJ. 

Why would bankers not want to take any amount of deposits, park them in reserves at the Fed or short term Treasury bills, charge fees and a slight interest spread, and sign up for an early tee-time at the local golf club? Sure "net interest margin" or other metrics might not look good, but money is money and more money is more money. 

The answer: 

Top of mind for many big banks is a rule requiring them to hold [sic] capital equivalent to at least 3% of all assets. Worried about the rule’s impact during the pandemic, the Fed changed the calculation in 2020 to ignore deposits the banks held at the central bank, but ended that break this March. Since then, some banks have warned the growing deposits could force them to raise more capital, or say no to deposits.

This is a fascinating little insight into the crazy world of our Fed's risk regulation. 

Taking deposits and investing in reserves is a risk free business. The Fed should be encouraging narrow banks, not harassing the few that try, or squashing narrow-banking activity. Perhaps the Fed is so unsure of its regulatory tools that it must put a capital charge in on this clearly risk free activity. But looked at either way it does not validate the usual cheerleading for the fine-toothed dirigisme of the hundreds of thousands of pages of bank regulation that they cannot recognize this simple fact. On to regulating climate and inequality... 

In recent months, banks including BNY Mellon have focused on moving clients from deposits into money-market funds, which are common cash-like investments. Assets in money-market accounts, even ones run by the same bank, are treated differently under bank capital rules, alleviating some of the regulatory pressure.

The money-market funds, in turn, need new places to park all that new cash and earn some interest. But rock-bottom interest rates have pushed them into storing it back at the Federal Reserve overnight...

Proving the point. Just hang a sign "money market fund" on the same activity and it needs no capital. 

To be clear, I think banks should be required to issue lots and lots more capital to fund risky investments. And deposits should flow to reserves via narrow banks that need essentially no capital. Perhaps it is the commingling in bankruptcy that forces a 3% capital charge on narrow banking within a bank. Still, the affair reveals just what a mess the whole effort is. If they can't get this one right, imagine what the rest looks like. 

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