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If the Fed needs digital currencies, rethink deposit insurance first

In the Federal ReserveDigital currencyShould refocus on the reform of federal deposit insurance. From the depositor’s point of view, the only significant difference between Federal Reserve digital currency deposits and traditional bank deposits is that the latter has limited coverage of deposit insurance.

The Federal Reserve issues two types of central bank money: paper Federal Reserve banknotes and digital Federal Reserve Deposit Recorded in (electronic) ledger entries that have no physical format. Digital Federal Reserve Bank deposits can only be held by financial institutions (mainly banks) that are eligible to have a Master Account with the Federal Reserve Bank.

Most companies and consumers are forbidden to own a federal reserve master account, so exchange central bank money in the form of paper currency for “bank money” (equivalent to paper federal reserve banknotes) Owns a digital currency in the form of possible banknotes). Unlike central bank digital money, bank-issued digital deposits can incur default losses if the bank that issued the deposit fails. Bank deposit balances of up to $ 250,000 per depositor are fully insured by the Federal Deposit Insurance Corporation, but the maximum effective insurance coverage for bank deposits is simply to hold deposit accounts at multiple banks. You can increase it.

Bank for International Settlements Define The central bank’s digital currency is “a digital payment instrument expressed in national accounting units, which is the direct responsibility of the central bank.” Federal Reserve Master Account deposits are in digital central bank currency, but current legislation and regulations severely limit their ownership. The discussion of the benefits of the Federal Reserve issuing digital currencies is essentially a discussion of the purposes and restrictions associated with the Federal Reserve master account.

Federal Reserve digital currencies for non-bank depositors can be easily created using existing institutions and payment systems. It invents a new class of bank deposits that are 100% backed by deposits in the issuing bank’s Federal Reserve Master Account, which has ownership completely separate from other deposit accounts issued by the issuing bank in the FDIC Bank Resolution. Can be created by. In other words, if a bank goes bankrupt, the Federal Reserve balance associated with this special class of depositors remains the property of the bank’s account holder, and these, as FDIC currently does normally, The account will be transferred to another financial institution with the ability to pay. Insured bank deposits in the event of a bank failure.

This special type of bank deposit is fully guaranteed by the federal government and should be completely exempt from the assessment of deposit insurance premiums. Unfortunately, new legislation is needed to exclude these deposits from the deposit insurance valuation base. From a practical point of view, there must be a legal delay between the time a customer requests a regular bank deposit to be transferred to this new class of deposit and the actual transfer is made. .. Banks need a reasonable period of time to adjust their investments to accommodate changes in federal master account reserve balances generated by shifts between deposit accounts.

Banks are free to offer these new types of deposits as needed, perhaps with their own limitations on the ability of account holders to transfer funds between the bank’s regular deposits and the Federal Reserve’s digital deposit account. Can be provided. These new Federal Reserve digital deposits are fully transferable through existing bank payment systems, making real-time retail payment processing available, making them faster and more efficient. No new “blockchain” payment system network or other changes to the current payment system are required.

One of the big open questions is whether the Fed should pay interest on the bank balances of these separate master accounts. If the Fed does not pay interest, these balances will be treated the same as banknotes or banknote deposits before the Dodd-Frank Act is enacted. If these accounts pay interest, the interest rate may be set differently than the interest rate currently paid by the Fed to the bank’s master account balance. Under this approach, special digital currency account rates will be a new tool for implementing monetary policy. The “high” rates of these accounts draw money from traditional bank deposits and money market funds into the Fed’s digital currencies, reducing the lending capacity of financial intermediaries and limiting economic growth.

If bank investors run out of traditional bank deposits and money market funds to secure Fed’s digital currency account, Fed’s digital currency remains a potential destabilizing force for financial panic. .. The legally mandated time delay between receiving a remittance application and being remitted can be of great help in eradicating these concerns.

Paul H. Kupiec is a resident student at the American Enterprise Institute (AEI), studying systemic risk and the management and regulation of banking and financial markets.



If the Fed needs digital currencies, rethink deposit insurance first

Source link If the Fed needs digital currencies, rethink deposit insurance first

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