Banks

Once you've mapped out your preferred answers to the the previous areas of consideration (links to catch up are at the end), it's time to consider your options. In today’s “Cash Plan” post by Mayfair , we are starting with checking and savings accounts.

Traditional banks are the default place to park your cash into instruments called checking and savings accounts. These offer instant liquidity and are risk and maintenance-free. Their only drawback is low interest rates, even when average rates are high.

Let’s take a giant step backwards and understand what a bank and related accounts are starting with what the business model of a bank is. A greatly simplified and common explanation follows. If you want to understand this in depth instead and have a finance background, you can read this superb paper from the Bank of England instead [1]

Stylistically, banks take business and/or consumer deposits and use that cash to make investments (e.g. buy Treasuries or mortgage-backed securities) or lend the funds (e.g. car loans or home mortgages). The amount of money they make is the difference between what they pay for deposits, and what they make on investments and loans. For example, if a bank pays 1% on deposits and makes a loan at 7%, the bank nets 6% in income.

Banks like deposits because they are generally stable sources of funding, and cheaper than the alternatives, such as funding themselves in capital markets with debt or equity (expensive and limited volume is available) or borrowing at the Fed [2](more expensive than deposits and a source of stigma in the US to tap this).

Banks also don't pay the same amount on each deposit. Because many deposits will not be hunting for yield, the bank continues paying a very low level: for instance, as of mid-April 2023, the FDIC's own statistics show an average paid savings account rate of only 0.39% [3]. To have sufficient capital for profitable investment and loan opportunities, banks are happy to pay a much higher rate on deposits at the margin, and the blended cost of funding still ends up very low.

Within the US, banks also have the ability to put money with the Federal Reserve in what's known as a reverse repurchase agreement as part of the Fed's reverse repurchase program (RRP) [4]. At the time of writing, this yields about 4.8% [5], materially higher than what banks are paying for even the most expensive deposits.

If you want to know exactly what a specific bank is doing, you can read its financial statements or use the FDIC's BankFind Suite [6] and look up standardized financial information.

As for Mayfair, we are a high-yield cash account. Dead simple. Does just one thing - grows your idle cash.

US Banking History (from the American Bankers Association): [7]

1782: The First American Bank Congress charters the Bank of North America—the first financial institution chartered by the United States and the first real bank in the young republic. A de facto central bank whose shares were held by the public, the Bank of North America raised money to support the ongoing war against Britain. Philadelphia financier Robert Morris, who had given millions of his personal wealth to support the war, was the bank’s first superintendent.

1784: Hamilton and the Bank of New York Future Treasury Secretary Alexander Hamilton founds the Bank of New York, the oldest continuously operating bank in the United States—operating today as BNY Mellon. The Bank of New York and the Bank of Massachusetts, founded the same year, are the first two state banks; the latter, through mergers, becomes part of what is today Bank of America.

1785: The Almighty Dollar The Continental Congress adopts the dollar as the United States’ official unit of currency.

1791: The First Central Bank On the urging of Treasury Secretary Alexander Hamilton, Congress charters the First Bank of the United States for a 20-year term. Its purpose is to lend to the government, make loans to businesses and provide a stable money supply through its notes. The new central bank triggers the formation of 18 new commercial banks in just five years, compared with four in all of the United States prior to the First Bank’s chartering.

Per the FDIC, the “First Bank” 20-year charter was not renewed, and in 1811 it is bankrolled by New York merchants and newly chartered by the state of New York. Today that bank is known as Citibank. [8]

? Tomorrow in our series, Part 3.2: Neobanks

#finance #banking #history

Catch up on the "Cash Plan" level-up education series:

• Intro
• 1.1 How much cash?
• 1.2 Outflow vs. Idle Cash
• 2.1 Rate
• 2.2 Risk
• 2.3 Liquidity
• 2.4 Effort

Footnotes:

• 1. Banking in Depth https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf
• 2.Fed Borrowing https://www.frbdiscountwindow.org/
• 3. FDIC rates https://www.fdic.gov/resources/bankers/national-rates/index.html
• 4. Reverse Purchase https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/repo-reverse-repo-agreements
• 5. Fed Yield https://fred.stlouisfed.org/series/RRPONTSYAWARD
• 6. Bankfind https://banks.data.fdic.gov/bankfind-suite/bankfind
• 7. ABA https://www.aba.com/about-us/our-story/aba-history/1782-1799
• 8. FDIC https://www.fdic.gov/about/history/timeline/1700s.html