In a new working paper, “A Public Option for Bank Accounts (or Central Banking for All),” legal scholars Morgan Ricks, John Crawford, and Lev Mandand argue that the Fed should no longer restrict its clientele to banks and the U.S. Treasury. It should also allow the general public to open no-frills transaction accounts at the Fed called “FedAccounts.”
Although FedAccounts would be open to “all legal residents and firms,” they would specifically target the 6.5 percent of the U.S. population who remain unbanked. Unlike private bank accounts, FedAccounts would have virtually no fees. This might make them attractive to the 25 percent of the unbanked who cite high bank fees as a reason why they remain unbanked.
The accounts also wouldn’t have minimum balance requirements. Poorer customers could open accounts with whatever meager savings they have at their disposal. This might appeal to some of the 52.7 percent of the unbanked who claim they are unbanked because they “do not have enough money to keep in an account.”
Lastly, FedAccounts would offer “real-time gross settlement” of checks and electronic money transfers. This instantaneous settlement of payments might make them especially appealing to businesses who regularly make and receive large-scale payments. The authors conclude that “FedAccounts would offer all the functionality of ordinary bank accounts,” but for only a fraction of the cost.
FedAccounts are a fairly radical solution to what in reality is a fairly minor problem. The financial exclusion rate in the U.S. might be high relative to some other OECD nations (Canada, by contrast, has a financial exclusion rate of only 0.5 percent). The rate is far from alarming, though. At 6.5 percent, it is on par with that of Western European nations like France and England. There is certainly room for improvement — but not enough to warrant further complicating the Fed’s mandate by adding universal financial inclusion to it.
FedAccounts would also suffer from many of the same drawbacks as postal banking. One of the biggest reasons why so many are unbanked is privacy concerns. This is especially true for the disproportionate share of the unbanked who operate in the underground economy. Banking at the post office or the same bank as Uncle Sam might not be too appealing to this segment of the unbanked, for obvious reasons.
It’s also not clear that FedAccounts are better-suited to reduce financial exclusion than private alternatives. The financial exclusion rate has already declined from 7.7 percent to 6.5 percent over the past eight years. Most of this decline has come from financial innovations in mobile banking that have made it cheaper for banks and nontraditional firms ranging from Apple to Amazon to provide digital financial services to millions of customers, including the unbanked. As I’ve argued elsewhere, the best way to reduce financial exclusion would be to make it easier for more private firms to enter the market and offer innovative financial products in a lighter regulatory environment.
Even if FedAccounts proved to be successful at attracting customers, they might have unintended consequences. Under the proposal, the Fed would pay depositors the same interest rate that commercial banks receive on their reserve balances held at the Fed. That rate is currently set at 2.4 percent, significantly higher than the rates paid by banks on deposits. These above-market rates wouldn’t just appeal to the unbanked. They’d also likely attract millions of already-banked individuals and firms. This could drain millions of dollars of deposits from private banks. The Fed would then invest these deposits in the assets it typically buys: U.S. Treasuries.
Why is this problematic? The private financial sector is far better than central banks at channeling society’s savings into productive investment projects. Any policy that encouraged people to withdraw money from their private bank accounts and deposit it at the Fed would put a drag on the economy. It would result in more of society’s savings going toward financing government debt rather than loans to the private sector. The Fed has already taken on an outsized role in allocating credit in the economy since it began dramatically expanding its balance sheet in late 2008. Expanding its “credit footprint” even more isn’t a formula for faster growth. It’s a recipe for stagnation.
As with recent calls for postal banking, the FedAccounts proposal by Ricks, Crawford, and Mandand is well-intentioned. But good intentions are no guarantor of good outcomes. At the end of the day, the private sector is capable of reaching the unbanked in ways that won’t create a variety of negative unintended consequences.