Ann E. Misback
Secretary
Board of Governors of the Federal Reserve
230 S LaSalle Street
Chicago, IL 60604
RE: CBDC Benefits, Risks, and Policy Considerations
Sent via electronic mail to digital-innovations@frb.gov
Dear Secretary Misback:
We appreciate the opportunity to provide our comments on the subject of a Federal Reserve central bank digital currency (CBDC).
The National Community Reinvestment Coalition and its grassroots member organizations create opportunities for people to build wealth. We work with community leaders, policymakers, and financial institutions to champion fairness and end discrimination in lending, housing, and business. We promote access to basic banking services, affordable housing, entrepreneurship, job creation, and vibrant communities for America’s working families. Our 600 members include community reinvestment organizations, community development corporations, local and state government agencies; faith-based institutions; community organizing and civil rights groups, minority and women-owned business associations, and local and social service providers from across the nation.
We view the prospect of a CBDC with great skepticism for many reasons of discussed in this comment. In an initial analysis in its January 2022 white paper, the Federal Reserve suggests that the US economy would benefit from a CBDC that is “privacy-protected, intermediated, widely transferable, and identity-verified.” However, it made that statement with two caveats – first, the Federal Reserve has not taken a position in favor of any policy outcome, and second, it remains agnostic on the “ultimate desirability” of a CBDC. When buttressed by those conditions, the white paper cannot be said to offer a proposal. Nonetheless, this comment will refer to the structure described as the “initial analysis.”
I. An intermediated CBDC would undermine community reinvestment activities.
- A CBDC does not require deposit insurance and thus would not come with a community reinvestment obligation
- The loss of community reinvestment benefits cannot be considered minor.
- iii. An increase in uninsured deposits threatens the size of bank branch networks. Underserved communities will bear the brunt of the harm.
II. Banks will prefer CBDC to insured deposits. The Federal Reserve will have to pick “winners and losers,” dramatically expand its role in the economy, and CBDC could cause it to play a more significant role in how banks operate.
- Banks will prefer holding CBDC to accepting fiat deposits from consumers.
- Consumers will prefer a CBDC because it will be less risky than deposits held at a bank.
- The Federal Reserve would have to choose how it allocates CBDC to intermediaries. If the Federal Reserve wanted to control the amount of CBDC in circulation, it would be forced to pick “winners and losers” among its member banks.
- The Federal Reserve would have to expand its asset holdings.
- Issuing a CBDC through intermediaries would create a moral hazard where banks reduce their underwriting standards without increasing the risk to their balance sheets.
- The likely remedy to help the Federal Reserve avoid expanding its balance sheet is highly suboptimal. The Federal Reserve could be put in a position of setting rules for how banks invest their holdings. This remedy would reverse the availability of credit.
III. The Federal Reserve should prioritize the completion of FedNow
- FedNow will provide the benefit of real-time gross settlement of funds to all participants in the banking system.
- By its use of ISO 2022, FedNow will enhance the information appended to payments and, in doing so, will mirror the capabilities of blockchain.
- Before the Federal Reserve brings FedNow to market, it should clarify that the system must build strong protections against fraud.
- The lessons learned from the United Kingdom’s experience with RTGS serve as a cautionary story and underscore the need for regulators to protect consumers from sender-authorized fraud.
IV. Claims that CBDC will enhance financial inclusion are unfounded and would be further compromised by intermediation.
- An intermediated CBDC will not lead to the financial inclusion benefits.
- It may be hard to convince consumers that their privacy will be protected when they use a CBDC.
- A simple and effective alternative would be to require depositories to offer fee-free bank accounts, without overdraft or insufficient funds fees, as a condition of access to a Fed master account.
NCRC Calls on Federal Reserve to Refrain from Issuing CBDCDISCUSSION
I. An intermediated CBDC would undermine community reinvestment activities.
1. A CBDC does not require deposit insurance and thus would not come with a community reinvestment obligation
The Federal Reserve’s white paper states that a CBDC will not require deposit insurance. Community reinvestment obligations apply to deposits held in insured bank accounts at national banks, savings associations, and state-chartered commercial and savings banks.[1] By definition, intermediated CBDC would fall outside of that criterion. The distinction is problematic on several levels.
On principle and as set forth in settled law, receiving a banking charter is a privilege. To benefit from that privilege, banks must have community reinvestment obligations. However, the requirement to perform community reinvestment activities only extends to institutions that accept deposits that the FDIC insures.
Communities depend on the work fostered by the Community Reinvestment Act as a source of funding for needed projects. These projects might never attract capital, even though they address critical social goals. Since its passage forty-five years ago, the CRA has developed an ecosystem whose components form the infrastructure for the creation of affordable housing, the expansion of credit to underserved consumers and small businesses, the existence of bank branches in low-and-moderate income communities, the provision of needed deposit services, programs to increase homeownership, and many other beneficial endeavors.[2]Any step in a direction that undermines CRA is a step in the wrong direction.
2. The loss of community reinvestment benefits cannot be considered minor.
Neither the Federal Reserve’s Money and Payments paper[3] nor the February 2022 report to Congress by the Congressional Research Service[4] consider how a CBDC would undermine community reinvestment work. NCRC is very concerned. Given why consumers and small businesses could prefer a CBDC to the option of placing deposits at commercial banks, we fear that a very significant share of consumer deposits will migrate to CBDC. Absent the passage of legislation by Congress, the linkage between taking insured deposits and having a community reinvestment obligation will not expand to cover liabilities of the Federal Reserve.
If they could secure enough CBDC, some banks might decide to stop taking deposits from consumers entirely. In theory, those institutions would have a CRA exam but no deposits and no assessment areas. Alternatively, they could remain a Deposit Insurance Fund (DIF) member. Yet, they would not need to contribute to the DFI without insured deposits. While national banks must have deposit insurance, state-chartered banks do not. In the long run, if the management of a state-chartered bank elected to no longer have deposit insurance, they could cease to have a community reinvestment obligation.
A decision by the Federal Reserve to hold retail deposits as uninsured liabilities is a step in the wrong direction.
3. An increase in uninsured deposits threatens the size of bank branch networks. Underserved communities will bear the brunt of the harm.
Any version of a CBDC would harm consumers by reducing the amount of capital subject to community reinvestment obligations. The choice to place deposits in an insured private bank will compete against placing funds at the Federal Reserve. Because funds held at the Federal Reserve will have zero credit or liquidity risk, CBDC will be preferable. As a result, the concern is also one of magnitude. CBDC will offer advantages not just to the unbanked and underbanked, as its advocates have emphasized, but to everyone. It is entirely possible that all depositors will conclude that CBDC is a superior choice in the long run. In effect, the introduction of CBDC portends an existential threat to the CRA.
Relatedly, a macro reduction in insured deposits could reduce some of the impetus for banks to maintain their bank branch networks at current levels. The effect might undermine the quality of deposit services because it would break the linkage between serving consumers well and attracting deposits.
Moreover, not every community would suffer equivalently. Branches in underserved areas would be the highest threat of closure. If new CRA regulations establish quantitative incentives that link the number of branches in underserved areas to the size of a bank’s asset holdings, banks will be secure that they have the regulatory moat to make these decisions. While intermediation would perpetuate the need for commercial banks to provide services through branches, the uncertainty is unsettling, and the possibility of unexpected problems seems high.
II. Banks will prefer CBDC to taking insured deposits. The Federal Reserve will have to pick “winners and losers,” dramatically expand its role in the economy, and could cause it to play a more significant role in how banks operate.
In the initial analysis, the white paper suggests that a CBDC would not require deposit insurance, would be a liability of the Federal Reserve, and would not carry any credit or liquidity risk. By contrast, commercial bank money does contain some risk. Deposit insurance addresses some of the risks, but other risks remain.
Economists observe that rational actors will attempt to hoard the better form of money when there are two versions of a currency, where one has superior features. While there may be a time when the different versions still trade equivalently and at par, Gresham’s Law says that the disequilibrium will ultimately result in a divergence of valuations.
CBDC thus will trend toward supplanting private bank money as the preferred form of currency, leading to the creation of moral hazards that increase systemic risk. For the reasons mentioned below, depositories and consumers will prefer CBDC to insured deposits.
1. Banks will prefer holding CBDC to accepting fiat deposits from consumers.
Banks, with very few exceptions, choose to insure their deposits. When they do, they incur the cost of paying into the FDIC’s Deposit Insurance Fund (DIF). They will not have that obligation for CBDC, as those funds will not bear credit or liquidity risk.
Banks will have an unlimited appetite for more CBDC deposits. Except for very low-interest rate environments, depositories have had to pay interest to depositors. Banks could receive CBDC without paying interest in an intermediated system and hold those funds without paying deposit insurance. True, consumers might receive interest on the CBDC they place in a bank, but the Federal Reserve would pay those costs.
2. Consumers will prefer a CBDC because it will be less risky than deposits held at a bank
The provision of deposit insurance protects against runs, but it can take time to restore access to insured dollars. Historically, consumers who withdrew their funds had only one option to hold cash. With the rise of shadow banking, money market accounts emerged as a second option. However, cash has significant shortcomings – it can only be spent in person, is vulnerable to theft, does not provide a return, and cannot benefit from some payment services offered through a bank. Money market funds offer a return and are protected against theft but are riskier than insured deposits. In almost every way, a CBDC’s benefits are more significant than cash or money markets. Moreover, it will be very easy to move funds from an insured account to a CBDC.
The Federal Reserve’s January white paper asks if the relative attractiveness of a CBDC in comparison to private bank money could be mitigated by a policy of offering interest rates below those paid by insured commercial banks. In our view, this policy seems attractive on its face but would further advantage a Federal Reserve account above one at a commercial bank account.
At any moment, the prospect that a risk-free account would also pay interest at a rate above that offered by a commercial bank would drive more deposits to CBDC, but the effect could be potent during times of distress. Given that policymakers lower interest rates at times when there is a need to stimulate the economy, the difference at a time when demand deposit accounts pay almost nothing would pose a powerful attraction, leading to a scenario where the presence of a CBDC dampens the availability of credit in the market at a time when it is needed the most.
Some of the leading proponents of a CBDC have argued that a FedAccount could pay retail consumers an interest rate that matched that paid by the Federal Reserve to member banks and at rates that were higher than on offer to consumers through a retail bank.[5] That policy would seem only to drive more deposits away from insured banks.
If the Federal Reserve did issue an intermediated CBDC, it must allow fiat insured deposits to be interchangeable at par with CBDC. Versions of dollars must be interoperable.
3. The Federal Reserve would have to choose how it allocates CBDC to intermediaries. If the Federal Reserve wanted to control the amount of CBDC in circulation, it would be forced to pick “winners and losers” among its member banks.
Owing to the many benefits of CBDC versus commercial bank money, banks will be strongly motivated to serve as the intermediary institutions for CBDCs.
In forecasting the likely impacts on the market, it should consider a potential outcome where depositories petition the Federal Reserve to receive the highest possible allocation of CBDCs. The resulting pressure from banks and their political agents will put the Federal Reserve in an unenviable spot of picking winners and losers inside the commercial banking system.
The process of making these allocations will become a subject of great political controversy. Large banks may argue that they are the most efficient stewards of funds, and community banks are likely to contend that an unfavorable allocation by the Federal Reserve would be tantamount to a government-led policy to destroy small banks.
It is hard to overstate the degree to which banks will desire CBDC. It will become a matter of financial success or failure. For example, when the Federal Reserve allocates CBDCs, shares of recipient publicly-traded depositories will increase.
To the extent that the Federal Reserve’s rules allowed CBDC intermediaries to lend any of their CBDC funds to consumers or businesses, it would be required to adopt regulations specifying the types of consumers and businesses that would qualify for such loans and the terms and conditions for such loans. The Federal Reserve’s criteria for private sector loans would be highly controversial, and groups that were unhappy with the Federal Reserve’s criteria would exert great pressure on the Federal Reserve to change them.
4. The Federal Reserve would have to expand its asset holdings
The Federal Reserve would have to purchase new assets to counterbalance the new liabilities it would accept from CBDC holders. While it is impossible to have certainty over such obligations’ potential scope, we know that they could become substantial if CBDCs became widely utilized.
For each dollar liability of the Federal Reserve, it must hold a dollar in assets against it. Whereas dollars extended to commercial banks are self-balancing, CBDC is not. CBDC could dramatically expand the sum of liabilities on the Federal Reserve’s ledger. The Federal Reserve would have to purchase assets to restore itself to balance.
The Federal Reserve’s current practice is to buy US Treasuries and mortgage-backed securities. When the Federal Reserve buys these assets, it reduces the aggregate sum of debt available for purchase in the private market. By making these purchases, the Federal Reserve can influence yields on debt securities. Actions by the Federal Reserve to purchase debt have the cumulative effect of increasing bond prices and lowering yields. When the Federal Reserve has adopted a policy of quantitative easing, it has done so to reduce interest rates, increase asset prices, and increase household wealth. All of these results have a collective effect of stimulating the economy.[6] As of May 11th, 2022, the Federal Reserve held $8.9 trillion in assets on its balance sheet.[7]
The introduction of a CBDC would have profound implications for the Federal Reserve’s balance sheet size and its level of involvement in the US economy. A 2021 working paper estimated that the size of the Federal Reserve’s balance sheet might have to grow to an amount equivalent to one-third of US gross domestic product.[8]
5. Issuing a CBDC through intermediaries would create a moral hazard where banks reduce their underwriting standards without increasing the risk to their balance sheets.
Intermediaries will utilize CBDC deposits to extend credit. Any credit extended on CBDC would produce a higher net interest margin, all other things being equal.
A concern would be that the bank holding companies that own CBDC intermediary banks could hold risky assets. The Federal Reserve should only allow banks whose parent companies are subject to the Bank Holding Company Act to become intermediaries. Non-banks and industrial loan companies are not subject to consolidated supervision.
Allowing nonbank intermediaries would be especially problematic given the lack of federal supervision and the bigger problems they have had appropriately handling KYC issues. Nonbanks have both permitted widespread opening of fraudulent accounts (not only for stimulus money but also as vehicles for receiving money from payment scams) while at the same time overreacting to fraud concerns and shutting down or freezing legitimate accounts and preventing people from accessing their money.
6. The likely remedy to help the Federal Reserve avoid expanding its balance sheet is highly suboptimal. The Federal Reserve could be put in a position of setting rules for how banks invest their holdings. This remedy would reverse the availability of credit.
As soon as it begins to issue CBDCs, the Federal Reserve will face a quandary. For every liability on its balance sheet, it must add assets. Buying assets at a scale equivalent to CBDC in circulation, if CBDC is as popular as we imagine, would force the Federal Reserve to become a dominant asset holder in the economy. Many elected officials and political influences could respond to that prospect with alarm.
As mentioned above, the Federal Reserve has historically held Treasuries and government-backed securities. The Federal Reserve could increase its purchases of these instruments, but concerns about the size of its holdings would develop at some point.
Two alternative types of buyers would remain: “Wall Street” and CBDC intermediaries. While investors have an appetite for risk-free (Treasuries) and nearly risk-free debt (agency mortgage-backed securities), they face constraints in finding ideal baskets of risk-free and risky assets. They will not willingly shift their investment strategies away from Modern Portfolio Theory or other empirically-tested investment strategies. The only alternative for the Federal Reserve will be to condition a CBDC allocation on committing to purchasing Treasuries and agency debt.
Requirements would have the political benefit of increasing bond prices and lowering interest rates paid by the government on its debt, but it would represent a seismic shift in the independence of financial institutions. Many would argue that by setting rules for credit allocation, the Federal Reserve was overreaching.
While the political consequences would be suboptimal, the impact on economic growth would be even worse. These requirements would undermine the availability of credit. Deposits that once served as the basis for lending would not shift to holding these debt securities. With less capital, banks would make fewer loans. Loans create money, and fewer loans will generate less money. The effects will undermine economic growth. As an organization that calls for financial institutions to extend credit to underserved communities, we hold concerns that underserved communities would bear the worst impacts when financial institutions are forced to ration credit.
III. The Federal Reserve should prioritize the completion of FedNow
1. FedNow will provide the benefit of real-time gross settlement offunds to all participants in the banking system.
Real-time gross settlement of funds can solve many problems payers and payees face. Many current forms of payment present fundamental shortcomings. Pull payments, including checks and ACH, put consumers at risk of over-drafting their accounts. In 2020, consumers paid approximately $15.5 billion in overdraft and insufficient funds fees.[9] Additionally, in many cases, the recipients of those failed payments incurred fees as well. Retailers express their frustration with the frequency of returned ACH requests.
Industry journals already predict that if specific correctable issues regarding RTGS can be resolved, such as the lack of interoperability, RTGS will cannibalize ACH pull for P2B and reduce the use of checks.[10] Many retailers expect to implement QR codes to initiate real-time credit push payments at the point of sale, inside carts, bill pay, and in other significant contexts.
Many of the motives expressed by the supporters of CBDC focus on its benefits to underbanked and underbanked households. Chief among those claims is that CBDC provides immediate good funds settlement.[11] Advocates believe that RTGS will appeal to lower-wealth households who desire the opportunity to receive funds instantly or delay payment until a paycheck has settled, reducing their need to use non-bank money services and lowering the amount of money they spend to transact.[12]
While those claims bear truth, they ignore a crucial fact: many banks can offer RTGS services already, and once FedNow is launched, all member banks will have the ability to settle funds immediately. Our view is that opportunities to improve the payments system exist already and are not incumbent on the issuance of CBDC. When it introduces FedNow, for example, the Federal Reserve would improve on existing options by guaranteeing interoperability and ensuring strong consumer protections for faster payments.
2. By its use of ISO 2022, FedNow will enhance the information appended to payments and, in doing so, will mirror the capabilities of blockchain.
Another claim is that because CBDC runs on a blockchain, it will increase the amount of information that can be appended inside a payment, thus increasing the net value proposition for all participants. That claim also bears truth, but it is not exclusive to CBDC. FedNow will provide the same benefit. The Clearing House’s Real-Time Payments network uses ISO 20022, and FedNow will likely choose to use the same system. ISO 20022 will dramatically expand the amount of information embedded with a payment. For example, ISO 20022 would enable a business to include an invoice inside a request for payment message. ISO 20022 will support innovation and foster additional payment services, empower fraud analytics, and help to leverage artificial intelligence.[13]
3. Before the Federal Reserve brings FedNow to market, it should clarify that the system must build strong protections against fraud.
The Electronic Funds Transfer Act was enacted forty-three years ago – well before Congress could have considered the use of payments apps through smartphones; its error resolution provisions are sorely out of date.
While Regulation E protects consumers from unauthorized transfers, it defines an “unauthorized transfer” as one “initiated by a person other than the consumer without actual authority to initiate the transfer and from which the consumer receives no benefit.” 12 CFR § 1005.2(m).
Today, participants pay inside an inconsistent regulatory environment. Unauthorized transfers where the payment is requested by the fraudster using the consumer’s account and routing number confer error resolution protections. Today, unauthorized transfers initiated from the p2p apps or digital wallets in the marketplace are not protected equivalently.
Consider the significant contradiction in the remedies available to consumers who are victims of essentially the same scam:[14]
In the first, a fraudster impersonates a representative of the IRS. The caller tells the victim that a warrant will be issued for their arrest if a payment is not made immediately. The victim provides their bank account and routing numbers. The caller makes an ACH debit from the victim’s bank account.
In the second, the caller uses the same impersonation method. However, the caller provides their p2p account proxy. The victim sends a payment using a p2p app. While the funds came from deposits held inside a bank account, the payment order was made through an app.
In the first example, the victim has the right to resolve the loss of funds. In the second, the consumer has no right to redress.
We believe this gap unless clarified with protections, will ultimately undermine the adoption of all RTGS systems. The Federal Reserve asks about financial inclusion. The lack of protection from fraud is itself a hurdle to this goal.
We believe that a stepwise approach, where the Federal Reserve prioritizes FedNow above a new initiative of creating an intermediated CBDC, and where consumers enjoy protection from sender-authorized fraud schemes, will benefit participants in the payment ecosystem.
The Federal Reserve should clarify that faster payments will be protected from sender-authorized fraud, even if the payer authorizes the transfer and even if it is a credit push payment made through an app.
The Federal Reserve should establish these protections at the outset of FedNow. It should not implement FedNow without appropriate consumer protections.
4. The lessons learned from the United Kingdom’s experience with RTGS serve as a cautionary story and underscore the need for regulators to protect consumers.
The United Kingdom (UK) introduced its faster payments service in 2008, and as a result, its experiences provide a valuable reference point for the governance of real-time gross settlement operations.
A key lesson learned from the UK experience is that faster payments create an opening for fraud. Over time, fraudsters moved to faster payments to instigate ender-authorized fraud. Sender-authorized fraud describes activities where a scammer induces a person to send funds under a pretense. Examples mentioned include romance scams, CEO scams, impersonation of bank and law enforcement professionals, and invoice scams.[15] The same schemes occur in the United States, but for the moment, scammers must rely on slower-to-settle techniques, often requiring victims to purchase a prepaid debit card reload pack.[16] These techniques take longer and require more effort from the victim. Faster payments will streamline the process of running a sender-authorized fraud scam.
Unfortunately, current rules do not protect consumers if they authorize a payment. Technically, victims of sender-authorized scams have authorized a payment, even though they do not receive the intended benefit.
The UK has created infrastructure to help consumers avoid these kinds of fraud and initiated a system that provides funds for victims. The UK faster payment system now offers a “confirmation of payee” tool. It provides a function that matches a sort code (their bank routing number) with the recipient’s name. The software tells the sender if the name matches, if it is a close match, or if there is any inconsistency. Such a step will reduce “faster fraud.” Separately, participating banks and building societies have committed to compensating victims of sender-authorized fraud. While the system is voluntary and the amount of compensation is left to the judgment of the financial institution, it is a step in the right direction.
Similar to the annual payments studies released by the Federal Reserve, financial regulators in the UK disseminate data on the use of its payments systems. UK Finance releases a report focused solely on fraud. In 2021, ninety-six percent of all fraudulent “sender-authorized” payments involved a faster payment.[17]
IV. Claims that CBDC will enhance financial inclusion are unfounded and would be further compromised by intermediation.
1. An intermediated CBDC will not lead to the financial inclusion benefits.
Many of those most in favor of a CBDC contend that “FedAccounts” would increase access to banking services, facilitate the distribution of government payments, and reduce the costs paid by the unbanked to transact.[18] Proponents claim that FedAccounts would work without transaction costs, have no overdraft fees, pay account holders positive yields on riskless funds, and clear and settle immediately.
We share their hope that underserved households could have access to no-cost, overdraft fee, interest-bearing transaction accounts. We are enthused by recent announcements from many prominent banks of their intent to reduce or eliminate overdraft fees.[19]
Its supporters skirt essential concerns about how to support the upfront and ongoing operational costs of FedAccounts. They claim that even without a system akin to interchange, the system would attract the investment necessary to support innovation. While these adherents acknowledge that the question of how FedAccounts would interface with “legacy physical media is an important practical issue,” they suggest that the infrastructure and investments needed could be sourced from within the scope of existing commitments to the United States Postal Service, to engage banks in customer service (intermediation) or to engage non-bank retail stores in FedAccount customer service.[20]
It would be difficult to know exactly how much it would cost to operate a system of FedAccounts. The promise is undoubtedly enticing – transactions that are free for consumers, using accounts that pay interest on funds held, interoperable across payments systems, and ubiquitously accepted. While we cannot for sure know how much it would cost, it is undoubtedly non-zero on a per-transaction basis, and when multiplied by 174.2 billion (the number of domestic US non-cash payments made in 2018),[21] it could become a substantial non-zero sum. The Federal Reserve would bear some of those costs in an intermediated system, but many would fall to other ecosystem participants. True, FedAccounts could build their last-mile rails, including system-specific merchant acceptance terminals, but those efforts are directionally dissatisfying. With each new investment by the Fed in consumer-facing systems, more end-users experience disruptions, leading to more hurdles to adoption, resulting in less penetration among unbanked and underbanked households.
2. It may be hard to convince consumers that their privacy will be protected when they use a CBDC
One of the chief reasons cited by unbanked and underbanked consumers give for staying outside the financial system is privacy. In a context where CBDC is intermediated through a private bank, a privacy-concerned consumer will have more fear. In such an arrangement, they may believe private banks and the federal government will have access to their personal information. We acknowledge that the Federal Reserve is an independent body and not an agency of the federal government, but we believe the majority of the public maintains a view to the contrary. As a result, the net effect would double the hurdle among those who stay outside of the banking system because of privacy concerns.
We are inclined to agree that a CBDC could help support the increased usage of micropayments. It could also reduce the cost and hasten settlement times for cross-border payments. To the extent that those services constitute a small percentage of payments and do not pose moral hazards, deploying CBDC for these use cases may not pose some of the systemic risks mentioned earlier in this comment.
3. A simple and effective alternative would be to require depositories to offer fee-free bank accounts, without overdraft or insufficient funds fees, as a condition of access to a Fed master account.
The Federal Deposit Insurance Corporation’s (FDIC) Survey of the Unbanked and Underbanked represents the most substantive examination of individuals who choose to remain outside the banking system.[22] Most of the most commonly-given reasons that unbanked households reveal for not having a bank account would be addressed by the accounts:
- Don’t have enough money to meet minimum balance requirements (first choice 29 percent, 48 percent referenced)
- Bank account fees are too high (7 percent, 34 percent)
- Bank account fees are too predictable (2 percent, 31 percent)
The 2nd and 3rd most common reasons – “don’t trust banks” and “avoiding a bank gives more privacy” – are not addressable by any solution originating from a bank or through an intermediated CBDC. But of further significance, we call out that if accounts did not have the capacity to overdraft, it would overcome one part of the sixth most common reason. Policymakers should understand that the unbanked and underbanked population includes the “formerly banked.”[23] Those individuals left because the status quo failed to address their needs.
Most banks would prefer to earn one million dollars on one customer than one dollar on one million customers. However, some banks have taken the opposite approach in recent years: they offer overdraft-fee accounts that generate their revenues primarily through interchange. Notably, almost all of these banks have assets of less than $10 billion. Policymakers should acknowledge the root reason for this seemingly unexplainable outcome. The reason reflects the Durbin Amendment and the subsequent interpretation of the Federal Reserve on how interchange fees are regulated. Banks with assets of less than $10 billion can offer accounts with greater functionality than big banks. Large banks must limit pull payment options. Small banks can offer those services. Banks that insist on offering pull payment options face a strict ceiling on their interchange – roughly twenty-four cents swipe. By contrast, small banks have no such limits. The lack of a ceiling also extends to payroll cards. The beneficiaries of these rules are not the unbanked or underbanked – but large merchants that want to reduce their interchange expenses.
The FDIC’s findings suggest that conditioning the privilege of a master account on offering a genuinely inclusive bank account will promote financial inclusion. By contrast, building an intermediated CBDC is not an alternative that would move the payments system closer to financial inclusion.
The Federal Reserve provides four of the five “core” payment systems in the United States. A strong statement that puts an onus on depositories to create inclusive accounts will reduce the number of unbanked and underbanked households. A solution exists now. It will not require a CBDC.
CONCLUSION
We appreciate the opportunity to respond to the Federal Reserve’s white paper. For the reasons mentioned in this letter, we believe strongly that the Federal Reserve should not pursue a program to issue a central bank digital currency. An intermediated CBDC presents an existential threat to community reinvestment activities. It will force the Federal Reserve to pick “winners and losers,” and it may have to resort to influencing how financial institutions make credit allocation decisions. The Federal Reserve is still in the process of launching FedNow, so it would be a mistake to initiate a new effort of this scale and size. Moreover, real-time gross settlement of funds will satisfy some of the crucial needs that drive support for a CBDC. Finally, we are skeptical that a CBDC can lead to meaningful financial inclusion.
Please reach out to me or Senior Policy Advisor Adam Rust (arust@ncrc.org) to provide additional clarification on our comments.
Sincerely,
Jesse Van Tol
Chief Executive Officer
National Community Reinvestment Coalition
jvantol@ncrc.org
———
[1] Office of the Comptroller of the Currency. (2014). Community Reinvestment Act [Community Development Fact Sheet]. https://www.occ.gov/publications-and-resources/publications/community-affairs/community-developments-fact-sheets/pub-fact-sheet-cra-reinvestment-act-mar-2014.pdf
[2] Eugene Ludwig, James Kamihachi, & Laura Toh. (2009). The Community Reinvestment Act: Past Successes and Future Opportunities. Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act, 84–104. https://www.frbsf.org/community-development/wp-content/uploads/sites/3/cra_past_successes_future_opportunities1.pdf
[3] Board of Governors of the Federal Reserve. (2022). Money and Payments: The U.S.Dollar in the Age of Digital Transformation (Research and Analysis). https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf
[4] Marc Labonte & Rebecca M. Nelson. (2022). Central Bank Digital Currencies: Policy Issues (No. R46850; p. 34). Congressional Research Service. https://sgp.fas.org/crs/misc/R46850.pdf
[5] “Inclusive Banking During a Pandemic: Using FedAccounts and Digital Tools to Improve Delivery of Stimulus Payments., US House of Representatives, 116th (2020) (testimony of Morgan Ricks). https://www.congress.gov/116/meeting/house/110778/witnesses/HHRG-116-BA00-Wstate-RicksM-20200611.pdf
[6] Wessel, E. M., Tyler Powell, and David. (2021, July 15th). What does the Federal Reserve mean when it talks about tapering? Brookings. https://www.brookings.edu/blog/up-front/2021/07/15/what-does-the-federal-reserve-mean-when-it-talks-about-tapering/
[7] Board of Governors of the Federal Reserve. (2012). Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks (H.4.1; Federal Reserve Statistical Release). https://www.federalreserve.gov/releases/h41/current/h41.pdf
[8] Greg Baer. (2021). Central Bank Digital Currencies: Costs, Benefits and Major Implications for the US Economic System [Staff Working Paper]. Bank Policy Institute. https://bpi.com/wp-content/uploads/2021/04/Central-Bank-Digital-Currencies-Costs-Benefits-and-Major-Implications-for-the-U.S.-Economic-System.pdf
[9] Consumer Financial Protection Bureau. (2021, December 1st). CFPB Research Shows Banks’ Deep Dependence on Overdraft Fees. Newsroom. https://www.consumerfinance.gov/about-us/newsroom/cfpb-research-shows-banks-deep-dependence-on-overdraft-fees/
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