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In a current Motive journal interview, Lyn Alden makes an excellent level:
And Lyn Alden, founding father of Lyn Alden Funding Methods, says “banks are principally highly-leveraged bond funds with cost providers hooked up, and we deal with it as regular to maintain our financial savings in them.” She argues that the Federal Reserve makes it practically unattainable for banks to carry the majority of their prospects’ deposits in money as a result of “regulators need banks to be fairly protected, however not ‘too protected.’ They need all banks to be leveraged bond funds to a sure diploma, and received’t permit safer ones to exist.”
Is that this actually true? Do regulators refuse to permit ultra-safe banks? John Cochrane makes the identical declare (from a 4-year outdated weblog submit):
Suppose an entrepreneur got here up with a plan for a monetary establishment that’s utterly protected — it may well by no means fail, it may well by no means endure a run, it presents depositors good security without having for deposit insurance coverage, asset threat regulation, capital necessities, or the remaining, and it pays depositors extra curiosity than they will get elsewhere.
Slender banks are such establishments. They take deposits and make investments the proceeds in interest-bearing reserves on the Fed. They pay depositors that curiosity, much less a small revenue margin. Pure and easy. Economists have been calling for slender banks since at the very least the Nineteen Thirties.
You’d assume that the Fed would welcome slender banks with open arms.
You’d be incorrect.
Each are referring to the truth that the Fed refuses to approve “slender banks”, which make investments their funds within the most secure method potential—accounts on the Federal Reserve.
The media focuses on errors made by bankers and/or regulators, however the banking system is about as much as be unstable. Our political leaders need banks to take dangers. And when the inevitable occurs, there’s quite a lot of ethical grandstanding.
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