We are in a very confusing situation now, at least from the point of view of ordinary citizens. The bedrock of the global financial system are the banks, who get deposits and issue loans on behalf of a country’s central bank. But because most global central banks injected a lot of money into their economies during the COVID pandemic, aside from the money spent for different wars, and other crisis, the high global money supply is causing many countries to have high inflation. Central banks like the Fed have been raising interest rates for some time now, which is putting the squeeze on banks. Unfortunately that has resulted in bank failures such as with First Republic Bank, Signature Bank NY, Silicon Valley Bank and Credit Suisse.
Because of this, many depositors are afraid that their banks might be unstable and are seeing government treasury bonds with high yields this 2023. Thus a lot of money is moving from banks into money markets that invest in these treasuries. Others are moving into crypto.
Actually the dissatisfaction with banks has been there for some time. One complaint is that wiring or sending money from one bank to another takes time (generally using the SWIFT messaging system), has high fees, and often take advantage of the currency conversion float. This is one attraction that crypto offers over bank wires – the payment or money transfer is almost instantaneous.
To this point the Fed wants to offer its own alternative to the archaic SWIFT messaging system with something called FedNow.
FedNow is targeted to depository institutions in the United States and will allow instant payments to and from their bank accounts. So it’s not really a peer to peer system but basically just makes instant remittances possible between banks and their depositors. It is a flexible, neutral platform that supports many types of instant payments.
FedNow provides interbank clearing and settlement to enable funds transfers from the account of a sender to the account of a receiver in near real-time at all hours and days of the year. It is hoped that the banks can capitalize on this capability to offer better and faster services for their customers.
It will maintain uninterrupted 24×7 processing with security features to support payment integrity and data security. Like crypto, it will not just be open during regular banking hourse. Balances at the end of each day will be reported on Federal Reserve accounting ledgers for each bank every business day. In addition, the usual intraday credit will still be available to banks who need it.
FedNow basically provides a liquidity management tool to support instant payment between banks. Banks who suddenly need cash from others or the Fed itself can borrow funds to support liquidity needs related to client withdrawals and other situations. Each bank will basically have accounts at the Fed and these can easily transfer money between each other.
FedNow will also have fraud prevention tools, the ability to join initially as a receive-only participant, request for payment capability, and tools to support banks who want to avail of it. It will be released in phases. Additional features and revisions will be introduced over time. Others such as fee rates and terms of use will be released at launch. The target release date for the service is this coming May to July 2023.
While it does address the complaint about slow money transfers that cost too much, the situation right now is exacerbated by the bank runs and higher rates offered by money markets and treasury bonds as compared to savings deposits.
Will it keep depositors in banks? It remains to be seen, but nonetheless it is still a good development.
SOURCE:
- federalreserve.gov/paymentsystems/fednow_about.htm