Normally it takes a couple of days to settle payments in the banking system. But no longer. Later this month the Federal Reserve is introducing FedNow, which allows instant payment settlement 24 hours a day. Are you ready for the 20-minute 4 am bank run?
In addition to losing revenue from the time between a payment’s initiation and settlement, banks now have to worry about deposit flight outside of business hours. It comes just months after three major lenders failed in part because of rapid withdrawals and an inability to tap emergency sources of cash that were offline.
The March banking-sector crisis suggests cash can leave far quicker than bankers assumed, said Noor Menai, chief executive of Los Angeles-based lender CTBC Bank USA. Social media and smartphone apps allowed customers to withdraw deposits at a rapid clip, ultimately leading to a series of bank runs.
What could go wrong?
This seems plenty crazy to me...the WSJ article is pay-walled so I can't see what the underlying logic might be, (but as an owner of the To Big to Fail stocks, I suppose the bigger will only get bigger and so good for me....). Thanks for pointing out the Fed's seemingly continuing error in these regards. Traveller
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It never took two days to withdraw money from a bank - you could get it instantly, although you might have had to wait until the bank was open. The problem with the recent runs, aside from the Fed yanking the run out from under banks by devaluing their long-term bond investments and too many uninsured deposits, may have been more in how fast the panic could have spread through modern media of various kinds.
Most banks don't have significant investment in long term bonds, but I do agree that the real issue is how fast the panic spread through social media and similar electronic communications. Even if depositors had to write a check or initiate an online withdrawal, it would not have slowed the bank run by much.
Perhaps banks need to move from having significant amounts of funding provided by deposits, and employ a more stable source of funding. Banks are the only business I know of that can operate with long term assets funded with short term debt, supported by the Fed borrowing availability and the FDIC. Maybe that model may need to be changed.
Japan has had instant payment settlement since 1973, Switzerland since 1987. Europe and the UK got it 2017. The US actually already has it, just not through the Fed- the RTP system has been running for like six years.
Is the cancer in Kevin’s brain, or is he just getting generally crankier and dumber as he ages?
So nice of you to drop by, but please just leave.
+1
Yikes!! I’m going to take my money out right now!
Really, it's about time they do this. If a run takes 2 hours instead of 16, so what? It still happens in less than a day either way, and the bank is equally screwed.
If they had this in place last month, a bill I received late in the mail would have been paid on time. Because transactions only occur during "business hours", it was late, even though I paid 4 days before the due date (holiday weekend). Since when do computers need time off every night?
The bank run in the Mary Poppins movie took maybe five minutes. Of course, she was magic.
FedNow caps transfers at $100,000. Individual institutions can raise (up to $500,000) or lower that amount.
RTP currently caps such transfers at $1M.
Same-day ACH caps such transfers at $1,000,000, up from $100,000 some 15 months ago.
I think you need to trust WSJ less.
One might think that the Fed, or FDIC, or both, wouldn't operate a facility like this without also providing instantaneous credit lines to backstop the banks. Even before SVB the potential for this kind of problem would be obvious. And in fact they already adjust reserve accounts overnight, don't they, and this would essentially be a different way to implement that kind of operation? I feel like there must be more to this story than WSJ is telling.
I'm trying to figure out how someone could score big by kiting money using these instant transfers. There is probably some clever way to do so, especially now that interest rates are higher. I guess the gauntlet is on the ground now. We'll see who picks it up and whether the financial system recovers.