The Fed KILLED The Safest Bank In History | Darrell Duffie

**Haonan Li** (0:00)
This is such a compelling product that you are going to drain all the deposits out of all the banks, and the whole system is going to go kaput.

**Darrell Duffie** (0:05)
The Narrow Bank, rest its soul, was not a payments related firm. It was totally for safe investments, so for investors that wanted to put funds in a very safe place and earn a market interest rate.

**Haonan Li** (0:14)
It seems that the Fed there, through bureaucratic maneuvering, managed to strangle this thing to death.

**Darrell Duffie** (0:19)
There was another submission that I noted by DE. Shaw, which had tried to do the same thing, and of course also failed. We would have heard about it. Is there going to be some point in time where the regulators are going to say, no, wait, stop getting safer. We don't want you to be that safe.

**Haonan Li** (0:31)
You're too safe. Stop.

**Darrell Duffie** (0:33)
Stop, we want you to be riskier. Banks deserve to have competition where there's a better product. It should have an opportunity to compete. If stable coins do take off as a major part of our financial system, then banks would be threatened because they would either have to pay a much higher interest rate to keep their deposits, or they might even lose some of their business. I'm far from convinced, although you might not want to hear this, that stable coins will take a significant fraction of commerce payments. They might have greater success in emerging markets for cross-border payments.

**Haonan Li** (1:07)
Well, Darrell, so to start, I noticed that you were a director of The Narrow Bank way back in the day. Wow, you did your research. Yes, we do our work here.
And I think it's an interesting analog to maybe some of the current conversations about interest for stable coins and so on and so forth. And I wonder if you could tell us a bit about that journey of being a director of The Narrow Bank, what it was like to try to build this product. And if I understand it, the talking point against it is that this is such a compelling product that you are going to drain all the deposits out of all the banks and the whole system is going to go kaput. So it rhymes with a stable coin conversation a little bit. And so I thought that would be a cool place to start.

**Darrell Duffie** (1:47)
That's an interesting perspective. And I hadn't thought about the connection that closely because The Narrow Bank, rest its soul, was not a payments-related firm. It was totally for investment, safe investments. So for investors that wanted to put funds in a very safe place and earn a market interest rate or close to it. And so it is connected to the yield issue for stable clients.
The firm was founded by Jamie McAndrews, a former New York Fed executive, with the idea that large institutional depositors would like to be able to keep their funds in a very safe place and earn market interest rates. He got a provisional banking license from the state of Connecticut and then applied for what would have seemingly been a routine master account at the New York Fed. But like many other firms that have subsequently tried, the Fed refused, or to put it more carefully, they initially didn't answer the request. They waited quite a number of years. TNB, its business was threatened by the long delay, eventually litigated with the Fed, rather heroic venture. It lost in the litigation because the court said that the Fed was still making up its mind and this was four years after the application.
So TNB never came to be, unfortunately. But other firms are apparently in line to get what Fed Governor Chris Waller calls a payments account or colloquially a skinny account, which won't pay interest but will give them the ability to make payments. And since that's their business, maybe that will be at least a partial success for those non-bank payment related firms.

**Haonan Li** (3:53)
I wonder what you think of these counter arguments. It seems that the Fed there through bureaucratic maneuvering managed to strangle this thing to death. And I'm curious as an expert on market plumbing and financial plumbing, what do you think about the counter argument to the Narrow Bank effort, which is that it would train all the deposits from everywhere else, it's going to be Armageddon.
What do you think of those arguments? Are they overplayed? Is this the bank lobby gone amuck? Are there genuine concerns? I'm curious for kind of your take on that, Darrell.

**Darrell Duffie** (4:30)
Well, if stable coins do take off as a major part of our financial system, then banks would be threatened because they would either have to pay a much higher interest rate to keep their deposits or they might even lose some of their business to the extent that they are in fact harmed by the success of stable coins. That would be bad for banking. Whether it's bad for the economy is highly controversial. Banks deserve to have competition where there's a better product. It should have an opportunity to compete in my view. Economists have written a number of papers on whether in fact there would be harm to bank lending, which is what the Fed was most concerned about.