A Public Option for Bank Accounts (or Central Banking for All)

Morgan Ricks is Professor of Law at Vanderbilt University Law School; John Crawford is Professor of Law at UC Hastings College of Law; and Lev Menand is a lawyer in New York. This post is based on their recent paper.

Among the perks of being a bank is the privilege of holding an account with the central bank. Unavailable to individuals and nonbank businesses, central bank accounts pay higher interest than ordinary bank accounts. Payments between these accounts clear instantly; banks needn’t wait days or even minutes for incoming payments to post. On top of that, central bank accounts consist of base money, meaning they are fully sovereign and nondefaultable no matter how large the balance. By contrast, federal deposit insurance for ordinary bank accounts maxes out at $250,000—a big problem for institutions with large balances.

Our paper recently posted on SSRN, A Public Option for Bank Accounts (or Central Banking for All), argues that restricting central bank accounts to an exclusive clientele (banks) is no longer justifiable on policy grounds if indeed it ever was. We propose giving the general public—individuals, businesses, and institutions—the option to hold accounts at the central bank, which we call FedAccounts. FedAccounts would offer all the functionality of ordinary bank accounts with the exception of overdraft coverage. They would also have all the special features that banks currently enjoy on their central bank accounts, as well as some additional, complementary features. Government-issued physical currency is already an open-access resource, available to all; the FedAccount program would merely do the same for nonphysical or “account” money.

The FedAccount program would bring genuinely transformational change to the monetary-financial system, in ways both obvious and unexpected. Perhaps most obviously, it would foster financial inclusion. Millions of “unbanked” and “underbanked” households are currently ill-served by the mainstream U.S. payment system. FedAccounts, properly structured, would be a money-and-payments safety net for such households, lessening their reliance on expensive and subpar alternatives.

But FedAccounts would hold appeal across the income and wealth spectrum. The interest rate paid on central bank accounts (known as the interest-on-reserves or IOR rate) would be very attractive to large businesses and other institutions. Equally appealing to large institutions would be the sovereign and nondefaultable status of these balances. FedAccounts would be pure base money, an asset not realistically available elsewhere in “account” form. Further, free instant payments among FedAccount holders would create network effects: the system’s value to existing users would rise as more users joined. For all these reasons, we expect that take-up would be robust.

If adopted on a large scale, FedAccounts would bring about less obvious, but no less profound, systemic changes. Financial stability would be dramatically enhanced: we expect that FedAccounts would crowd out unstable, privately issued deposit substitutes, which are central to financial instability. Monetary control and monetary policy transmission would improve: current problems with “pass through” of policy rates would diminish or disappear. Also, because the Federal Reserve would not charge interchange fees on debit card transactions, FedAccounts would eliminate an implicit tax on retailers and consumers. Moreover, the system could usher in desirable regulatory simplification. Far from being fiscally expensive, we expect FedAccounts to generate revenue for the federal government—possibly a lot of it—all while imposing minimal or potentially zero user fees.

In the paper, we consider how the FedAccount program would affect the central bank, the banking system, and financial “intermediation” more generally. We find these effects salutary. We also compare the FedAccount program to several loosely related reform proposals: full-reserve banking, postal banking, and central bank “digital” or “crypto” currencies. FedAccount compares favorably. Finally, we anticipate objections on various grounds, including institutional competence; law enforcement and counterterrorism; cybersecurity and fraud prevention; privacy and civil liberties; the availability of supposedly better alternatives, such as regulatory mandates or Fintech payment solutions not involving direct government provisioning; possible effects on lending, small banks, and financial innovation; the loss of purported synergies between deposits and lending; and possible political obstacles to adoption. We address these objections and find them wanting.

The full paper is available here. A shorter version, geared toward a policy audience, is available here.

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