I feel like we're missing a key part of banking infrastructure: somewhere to just park cash.
Start-ups who raise a Series A aren't looking to earn 1% on it - it seems silly that they can't really do anything with it that doesn't take on risk, and that FDIC insurance for just storing cash only goes up to a low amount.
Sure, in the old days when money was physical and there were costs involved in storing it and transporting it that makes sense. But these days, I feel like I'd like to just be able to have an account straight at the Federal Reserve or something, which doesn't earn any interest, but lets me keep my cash sitting there without any risk of a run or anything like that.
But generally, I don't think I really need a bank. I want somewhere to temporarily store any amount of cash (Federal Reserve), and somewhere else that I can invest what I want, if I'm looking for a return, with some risk, on my money. Neither of those are really roles of a bank, right?
There are a few full-reserve banks,
(as opposed to fractional reserve banks), where your money is not gambled with at all, but nobody uses them because nobody wants to pay money to have a bank account.
There are Massachusetts banks insured by the DIF (the inspiration for the FDIC) that has insurance for deposits over 250k, but at that point you're kind of putting more faith in the state of Massachusetts than the U.S. government.
> Start-ups who raise a Series A aren't looking to earn 1% on it - it seems silly that they can't really do anything with it that doesn't take on risk, and that FDIC insurance for just storing cash only goes up to a low amount.
If this is what they're looking for, they should probably just be banking with a SIB [1]. Wells Fargo and Bank of America might pay laughably low interest rates on their accounts, and deposits might technically only be insured up to 250k, but the U.S. government cannot and will not let these banks fail under any circumstances because they would drag the entire U.S. economy down with them.
The government doesn't want you to "just park cash" because it makes monetary policy difficult and loans more expensive. Predictable and cheap credit is an necessary part of a functioning modern economy so the Fed incentivizes(forces) banks to use deposits to make loans.
Custodia in Wyoming has been going through this same thing, recently. They tried to start a 100% reserve bank. The Fed has been ignoring their application for a Master Account for two or three years, until just recently, they were told on the side to withdraw the application or it would be formally denied.
Then, according to the CEO of the bank, the Fed leaked to the press.
Great read. What conclusions should we draw? What should we do, if "money is no longer money"?
It seems like most normal people operate as though money... is money. What should change in the way most normal people do what they do with... whatever it's called now?
Sign up with a brokerage. Use their cash management account. Confirm its FDIC limits (many cover $1M+ with sweep functionality). If you exceed those limits, consider investing excess cash or cash equivalents in treasuries or money market funds that solely hold short dated government backed securities. This is what a Narrow Bank would do with demand deposits. Treasuries are backed by the Fed and the full faith and credit of the US gov; they are considered risk free.
Tada! You have replicated narrow bank functionality. None of us have enough pull to change Fed fractional reserve and banking regulatory policy unfortunately. If you can't change the wind, adjust your sails.
If you don't mind your deposits being exposed to fractional reserve lending and FDIC insurance, CDARS: https://www.intrafinetworkdeposits.com/ To my knowledge, it can provide at least $50M in FDIC coverage with sweeps under the hood, although someone on HN mentioned the other day the limit might be more. Ask your financial services institution what their limit is.
Many do, but even if they didn't, it's free to ACH money to your real bank checking account every now and then that you can spend and write checks with.
Brokers only lend out of specific core cash accounts (FCASH at Fidelity, for example). Whether you hold cash in those account types is your choice, it isn’t mandatory.
Sure they can. You cycle it through very short term treasuries - weekly buys of 4 week t-bills if you really want to be conservative about your cash availability. And if even that is too spicy for you, buy shorter-out t-bills on the market to keep your average maturity lower.
(This mirrors some of the primary strategies used by money market funds, but a startup is in a better position because they can probably accurately forecast their cash needs a week or a month out.)
That is not what they are asking for. Investing in t-bills either requires an account with Treasury direct, or some other brokerage. If you manage the t-bills yourself, then you have to manually initiate the transfers, which has risk of both human error (if you forget to transfer, or input the wrong amount) and counter-party risk (if the brokerage fails, you may not have access to your funds for a while). And for many companies the day-to-day operations require more than $250k in an account just to be able to clear payroll and invoices, so even if they put their reserves in t-bills, their primary account is still at risk.
Small startups and business can easily end up with cash in the multi-millions. We are talking about companies with a handful of employees, too small to warrant a full time financial focused position. As the OP mentioned, there is zero reasons we can't have a zero risk depositor account. And I think most folks would be happy to pay a small fee for the service, but fees should not be necessary as the provider can still get overnight rates. But the only reason we don't have one right now is because the government doesn't want to interfere with the banks ability to make money off of our deposits.
EDIT: For some extra context, I know someone that had a swap account at SVB. In theory they were protected, but they still lost access to their funds for multiple days, which can be very problematic for a business. And on top of that it wasn't (and still isn't) clear how one would recover swap accounts, so they spent the weekend reaching out to lawyers. At this point they have probably spent a week of time sorting this mess out. They are a small biotech focused on finding cures for diseases and have zero interest/resources for financial engineering. And for companies that typically only have 1-2 years of runway, loosing a week of productivity is a huge distraction.
Please explain to me what happens to a sweep account when the primary bank fails. Asking for a friend, who quite literally tried to get an answer to this over the weekend. Also, I asked this question in the Mercury thread where the founders were responding to questions and got no answer.
And apologies, but I added an edit before I saw your comment. But in that edit, I explain how the sweep account was of little comfort during this SVB debacle. If they had needed to make payroll on Friday, they would have missed it. And while the FDIC has restored access to 100% of funds thanks to the intervention, it is still unclear how and when they would have gotten access to the sweep accounts in the case of no intervention.
I don't know, but I can tell you that my attorneys were pretty optimistic about the state of what would happen for the sweep accounts at SVB that invested in external money market funds before there was a resolution. But they're attorneys, so they're not going to commit to a hard answer unless you're paying them, and this was a general information call.
That provides little comfort. I too would be optimistic that the funds would be recovered eventually. I am sure there are some vulture funds that will happily lend you some money at high interest rates while you spend six months in bankruptcy court trying to get access to your sweep accounts, but I don't think that is what most folks had in mind when they signed up for these types of accounts. Until the FDIC clarifies, or until these accounts are actually tested in a real life scenario, I suspect we won't be able to answer that question. So maybe we shouldn't promote them as a solution until someone can answer it confidently.
I don't think this is missing at all. It's literally just what a bank does. Historically, a bog standard, straight-up boring old school bank. No fancy investment banking, no crazy growth strategy, no risky lending to maximize returns, no emperor's-new-clothes financial fashion tricks that we must do now because everyone else does them.
I worked for many years at a bank that did just that. We happened to be able to offer significantly lower deposit rates than our competition, because we had very low exposure to the kind of banking that risks government takeover due to surprising repricing events.
Wealthy customers too lazy or otherwise unable to spread deposits around to stay below the deposit guarantees chose us to an overwhelming degree, in spite of competition that offered better rates.
Granted, it's in Europe. Don't know if there's stuff in the US environment that makes this harder.
Our HOA’s noname bank has a cash deposit sweep where they automatically loadbalance reserve cash between many banks so it stays under fdic limit. Done that for years. But what do i know I’m just an hoa board member not a unicorn startup cfo ¯\_(ツ)_/¯
> It's a lot easier to split $1M between four banks than to split $300M between 1200
If you tens of millions in cash, that money shoupd be managed proffeshionally. And anyway, why should preserving that money be anyone's problem other than the owner's?
There is no such thing as 'sace money' in the world. It just doesn't exist.
We as a society spend more effort making sure money is safe than we do making sure children are safe/not hungry.
A person walking outside cant be safe from getting hit by a car, a child cant be safe from getting an ilness, plant machinery cant be safe from breakdown, a city can't be safe from being hit by an earthquake.
reserves are for more than a rainy day fund. They're also for saving up for predicted maintenance needs. For instance, say the HOA is responsible for the roofs of all the residences (like if the residences are condos). It's a somewhat predictable and high expense that you can map out to 10 years down the line or something. Then you save up for it in your reserves.
Exactly. Many HOAs are now required to get periodic reserve studies that calculate predicted maintenance costs going out sometimes 30 years. Association Reserves did our study (<300 homes) and calculated we needed $1.4M to be 100% funded. Our HOA policies require only 60%, which we think reduces the risk of special assessments to a very low level, but that's still a lot of money. Association Reserves believes that property values in HOAs with high percentage reserves can be 5-10% higher than low percentage (<40%) reserves.
If you have an account with noname for $3,000k and noname has 12 accounts with localcorp1-localcorp12 each of $250k -- and noname goes poof, what happens?
I think, according to the preSVB rules, you get $250k from FDIC and then get a very strong claim to $2,750k from the rest of noname's assets (if no BigBank steps in to buy the part of noname you're connected to).
When I look at acc statement it shows a list of completely different banks each with <250K. If our bank goes bust I presume we get our first 250K that are sitting in the bank itself as soon as FDIC takes over which is enough for operations and will need to contact other banks for our money. It's more like a brokerage account than a regular deposit.
> Also, per FDIC rules, the 250k is per party attached to the account, so at least for a married couple it seems to be $500k per account.
Its per owner per account class, but what constitutes an owner varies by account class, and, IIRC, many class by definition have a single owner.
But, yeah, you can double your coverage in simple directly-owned accounts as a married couple by splitting funds between maxed out single accounts ($250K) for each party and a maxed out joint account ($500K) for a total of $1M in coverage, because single and joint accounts are separate categories.
Brokered deposits are insured in the depositor (not brokers) name. If they still happen to be over the $250K limit, they are historically the least likely accounts to get full value back in a failure, but as long as there is less than the insurance limit per bank, they are fully covered.
SVB offered a sweep account. Turns out it does not cover the lawyer fees that one will incur when trying to figure out how to recover those accounts. Maybe your HOA should hire a CFO ¯\_(ツ)_/¯
This is actually what CDBC proposals are about, at least originally. The idea is that by making the computing infrastructure of the central bank scale up and out, companies and even individuals can directly hold and transfer "hard money" i.e. money directly issued by the central bank, without needing an intermediary bank.
When I was last tangentially involved in such projects it was quite unclear how they thought this would interact with monetary policy. Narrow banks could easily be created today without any new IT systems, but generally, governments are unwilling to do what it takes to enable them for political and financial reasons. At some level it's another obfuscated way of raising revenue without explicitly raising taxes: they force people to deposit money in banks, force banks to lend those deposits to "low risk" counterparties like themselves giving them more money to spend on vote-winning policies, then if the banks go under they either print the money to bail them out (taxation via inflation), or force banks to charge the depositors (taxation with the banks as collectors), thus hiding the true nature of what's happening.
To get banks with zero risk deposits is therefore not really an infrastructure problem - banks could easily just park cash with the CB and then charge fees for administration of things like the websites, the branches and so on. The problem is to convince governments to reduce their spending levels to the point where they can eliminate the rules forcing banks to loan them money, which in turn would allow narrow banks/accounts to appear, and that in turn would allow them to start removing the guarantee on deposits. In such a system people who wanted ROI would have to explicitly move some deposits into funds that expose the liquidity risks and requirements, and which can be left to collapse without a bailout if they make big losses.
Unfortunately governments are currently stuck in a local minima. Although everyone can see that bank runs are bad, and that they're also easy to eliminate, doing so would require people to believe that the government will not bail out depositors at a fractional reserve bank if there's a run. For as long as people suspect the government's commitment to the policy is weak, the winning move is to keep banking with a fractional reserve bank and pocket the zero-risk interest yields. The suckers who put their money in a safer place will end up poorer than those who put their money into a bank that later collapses.
Any bank that tries that would have to charge a fee to cover costs and will quickly lose business to the other “banks” that don’t do that.
The fundamental lie here is allowing banks to tell you you have “cash” deposited and “available” with them. If the online app showed the truth - how your $10k you deposited turned into some shares in mortgage backed securities or whatnot, the alternative “just pay to park some cash” might be able to survive.
I have the same pet peeve about Amazon being able to tell you that you “buy” a Kindle book instead of buying a revocable license to read it temporarily.
It’s all false advertising really and it’s eroding competition and consumer trust.
Certainly for up to $250,000 deposited at an FDIC insured institution, it is absolutely true that you can assume that you have cash deposited and available. If at any time the bank gets itself into a position where they can’t make good on that, FDIC will fix it so you still have your cash.
That is precisely the mechanism that the federal
Government makes available that gives you a place to park your cash.
As a note, this is one reason to still keep some paper checks around for your FDIC accounts.
Because when SVB closed on Friday and reopened on Monday, you could have still used a paper check during that time and it would be honored; but online access may have been shut off.
I would think that it wouldn't be an issue, so long as your total for written checks that have not cleared is both not over your balance amount, and not over the FDIC $250k limit, but IANAL as well.
>The fundamental lie here is allowing banks to tell you you have “cash” deposited and “available” with them. If the online app showed the truth - how your $10k you deposited turned into some shares in mortgage backed securities or whatnot, the alternative “just pay to park some cash” might be able to survive.
That's basically what bond mutual funds are (including money market mutual funds, which closely simulate savings accounts via $1 share price), and they seem to have a market.
The operations fee required for that company posited to have just raised its series A to park its fat stacks of cash is going to be negligible (as it should be constant for any size of account).
Well the other side of the equation is it would be very very tempting to do something with all that cash. Like “let’s fire the CEO who doesn’t go for it” tempting. I don’t see this working without regulation.
The problem for the startup is they are already doing something super risky and so want to be 100% conservative with the cash used to finance their operations. The last thing their investors want to hear is "so yeah, you wanted us to shoot for the moon with your money, but we didn't want to lose out on a couple percent of interest so we invested it in the market and that's down 20% right now so we're having to wait a bit to execute part of our strategy as we expect that to go back up soon".
Like, the problem is that the mental model of this money is wrong: there needs to be a place where a company that intends to take a bunch of money in and then spend it over the course of a few years can do that without it causing everyone a bunch of issues as those deposits were supposedly backing loans to still other people (such as that story with the hashicorp people that was posted here yesterday with the Chase bank branch that failed to understand that a startup's goal is to lose money, not invest it).
The Federal Reserve doesn’t want to be in the business of managing all the infrastructure of payments.
Banks offer a deposit product that lets you do useful things like ‘get your salary paid directly into your account from your employer’s account’, and ‘use a debit card to authorize transferring a couple of bucks to Starbucks’s account’.
> Sure, in the old days when money was physical and there were costs involved in storing it and transporting it that makes sense.
???
This never stopped being the case.
Banks receive deposits and make loans. They are core pieces of modern banking. They play a role in increasing the monetary supply through debt servicing.
Banks make money from loans. A bank that didn't make loans would have to make money from deposits by charging a large fee to its depositors, and compete for deposits with other banks that don't charge a fee.
For most of us, a bank is a place to just park cash. Most people are well under the $250k insurance. It seems the government is willing to cover depositors above that amount now too (SVB).
The Federal Reserve Bank's current balance sheet (as of last Thursday, https://www.federalreserve.gov/releases/h41/current/h41.htm ) shows they hold $4.5 trillion in Treasury notes and bonds and $2.6 trillion in MBS (mortgage-backed securities) out of a total of $8.3 trillion. The first two numbers are face value not market value.
If market value is 10% less than face value for these securities on average, then the Fed would have unrealized losses of about $700 billion. But the Fed doesn't have the same insolvency or liquidity risks that ordinary commercial banks do.
The US dollar would go down in value if there were more dollar sellers than buyers. That would happen if those with dollars had something else to buy. The Us dollar index is up a bit today, so far. I'd imagine at the moment that a run on the dollar would be unlikely. But there could be some combination of circumstances . . .
Start-ups who raise a Series A aren't looking to earn 1% on it - it seems silly that they can't really do anything with it that doesn't take on risk, and that FDIC insurance for just storing cash only goes up to a low amount.
Sure, in the old days when money was physical and there were costs involved in storing it and transporting it that makes sense. But these days, I feel like I'd like to just be able to have an account straight at the Federal Reserve or something, which doesn't earn any interest, but lets me keep my cash sitting there without any risk of a run or anything like that.
But generally, I don't think I really need a bank. I want somewhere to temporarily store any amount of cash (Federal Reserve), and somewhere else that I can invest what I want, if I'm looking for a return, with some risk, on my money. Neither of those are really roles of a bank, right?