According to Federal Reserve data, the number of banks in the United States has declined significantly over the past century, from 30,000 in 1921 to 4,997 in 2021. Recently, the U.S. central bank denied Custodia Bank of Wyoming, a financial institution that held $1.08 for every dollar deposited by its customers. While there appears to be a need for such a bank after the collapse of the three largest U.S. banks, the Federal Reserve said board members are “growing concerned” about an institution with plans to focus only on a narrow sector.
Explanation of Why Fed Rejected Custodia Bank Highlights Adversity in Crypto Asset Sector
Shortly before the collapse of Cheyenne, Wyoming-based financial institutions Silvergate Bank, Silicon Valley Bank, and Signature Bank,Custodia Bank,was denied admission to the Federal Reserve System. The Federal Reserve Board specified that the application submitted by Custodia was “inconsistent with the factors required by law.” This week, the Fed issued an explanation of why it rejected the Wyoming bank, which would set Custodia apart from the numerous banks currently operating because it holds full reserves and more to cover its deposits.
Custodia’sstatementreleased on March 24 emphasizes the need for banks to operate in this manner in the wake of several bank failures.” The company said, “The historic bank failures of the past two weeks underscore the dire need for fully solvent banks that can keep pace with a rapidly changing industry in an era of rapidly improving technology. The model proposed by Custodia Bank of holding $1.08 in cash for every dollar deposited by its customers is just such a model.” Regrettably, the Federal Reserve did not pay enough attention and allowed bank run risk to accumulate at traditional banks.”
The Fedstated in its decision that it has “fundamental concerns” about Custodia’s application, including its “novel and unprecedented features”One of the problems the Fed has with Custodia’s business model, concentrating on narrow banking and serving crypto clients.” “In general, the Board has raised concerns about banks with business plans that focus on narrow sectors of the economy,” the U.S. central bank’s board said.” Those concerns are further heightened with respect to Custodia because Custodia is an uninsured depository institution that seeks to focus almost exclusively on providing products and services related to the crypto asset sector, raising more concerns about illicit finance and safety and soundness risks.”
Does narrow banking pose a threat to the current fractional reserve model?
Narrow banking is a system that limits lending activity to only safe, low-risk investments and maintains 100% reserves against theseAn editorialpublished by klgates.com in 2019details “the Federal Reserve’s recent actions aimed at maintaining the status quo. taken.”
The article notes that on March 12, 2019, the U.S. central bank issued an Advance Notice of Proposed Rulemaking (ANPR) for Regulation D. Authors Stanley Ragalevsky and Robert Tammero Jr. write that the Federal Reserve Bank of New Yorkdetailed that the Fed ANPR appeared at the same time that the Federal Reserve Bank of New Yorkwon its lawsuitagainst the financial institution TNB USA. TNB, a “non-bank,” sued the Federal Reserve Banksin 2012 over their application to become a narrow bank in 2010.
At the time, TNB argued that the Federal Reserve’s delay was due to pressure from traditional banks who saw TNB’s narrow banking model as a competitive threat; TNB’s argument is the very heart of the matter, since the current modern banking model is based entirely on a fractional reserve model It may be. With banks failing, a narrow bank or 100% reserve-based financial institution model could become very popular.
It could also encourage other banks to follow this trend, just as the outlier banks that emulated the member banks within the Suffolk system in the early 19th century benefited from the idea of a full reserve banking system. The arguments against the Suffolk system suggested that the banks were trying to establish a monopoly. One could argue, however, that the 83.34% decline in the number of banks from 30,000 to 4,997 over the past 100 years suggests a monopoly on free banking.
Meanwhile, Custodia has said it will take its problems with the U.S. central bank to court.” The Fed’s recently announced order is the result of numerous procedural anomalies, factual inaccuracies that the Fed has refused to correct, and a general bias against digital assets.” Custodia explained in a statement on Friday.” Custodia said that “the Fed’s recently announced order is the result of numerous procedural anomalies, factual inaccuracies that the Fed has refused to correct, and a general bias against digital assets.” Rather than choosing to work with banks that utilize a low-risk, fully reserved business model, the Fed has instead shown itself to be short-sighted and unable to adapt to changing markets.”
Custodia added:
Perhaps more attention to areas of real risk could have prevented the bank closures that Custodia was designed to avoid; it is a shame that Custodia has to rely on the courts to defend its rights and force the Fed to comply with the law.
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