FedAccounts Issue Update

Issue Update

Members of Congress have proposed legislation requiring the Federal Reserve to offer government subsidized retail bank accounts in conjunction with the U.S. Postal Service (“FedAccounts”). The proposal would require banks with assets greater than $10 billion to offer basic “pass through” bank accounts with the deposits resting at the Federal Reserve and not on the bank’s balance sheet. ABA strongly supports the goal of bringing more Americans into the banking system, but this proposal is impractical, highly disruptive to the existing retail banking system, and will not lead to long-term, wealth-building financial inclusion.

Why It Matters

The U.S. has a healthy banking system with approximately 5,000 banks that employ more than 2 million people. While FDIC insured depositors have never lost a penny of an insured deposit, banks will nevertheless be unable to compete with a government agency offering deposit accounts with an unlimited balance sheet and no regulatory constraints. FedAccounts would therefore draw deposits from banks of all sizes to the Federal Reserve balance sheet. The resulting reduction in deposits at retail banks would decrease the amount of funding available to make consumer and commercial loans and undermine banks’ ability to spur economic growth in their local communities. Community banks are likely to be hardest hit, as their customer relationships may follow FedAccounts to banks with over $10 billion in assets.

Nationalizing the retail banking system in this way would also have limited impact on the long-term wealth-building potential of unbanked Americans. Consumers already have nationwide access to low-and- no cost bank accounts through public-private partnerships like Bank On, and FedAccounts do nothing to address the other commonly cited reasons not to open a bank account such as privacy concerns and lack of necessary documentation to open an account.

Finally, requiring the U.S. Postal Service to provide banking services would extend well beyond the Postal Service’s core competencies, raise a number of serious regulatory and consumer protection questions, and could leave consumers less protected than they would be at a regulated financial institution. Ultimately, FedAccounts and Postal Banking would represent a seismic shift in our national banking infrastructure.

Recommended Action Items

• Congress should oppose government incursions into retail banking, which would disrupt the banking business model, restrict available capital for consumer and business lending, and destabilize the smooth operation of our financial system.
• Policy makers should work within the existing retail banking structure to encourage and support programs designed to bring more Americans into the regulated banking system. ABA is working with Bank On, an initiative of the Cities for Financial Empowerment Fund, which has helped banks open more than 3.5 million low- or no-fee certified accounts at over 28,000 branches across the United States.