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Why Is This Supersafe Bank Scaring the Fed?

TNB USA, “The Narrow Bank,” has an extremely narrow business model that’s spooking the Federal Reserve.
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Illustration: George Wylesol for Bloomberg Businessweek

The Federal Reserve is, among other things, a bank for banks: They keep deposits there and earn interest at a rate currently set at 1.95 percent. Big institutional investors that aren’t banks can also deposit money at the Fed, but they use a different program with a lower interest rate: 1.75 percent.

This suggests an obvious trade. An institution could deposit money with a bank, which would then turn around and deposit it with the Fed. The Fed pays the bank 1.95 percent interest, the bank collects a fee for its trouble, and the institution gets the balance—say, 1.9 percent.