Interbank market news scan: Could banks be relegated to money changers and merchant lending?

Links to follow today …

Banks, yields. Shares of banks and other financial institutions ticked down as Treasury yields remained well below recent highs. Financials Down As Treasury Yields Remain Under Pressure – Financials Roundup | Morningstar

Central banks, digital currency. Wall Street is warming up to the idea that the next big disruptive force on the horizon is central bank digital currencies, even though the Federal Reserve likely remains a few years away from developing its own. https://www.cnbc.com/2021/04/19/central-bank-digital-currency-is-the-next-major-financial-disruptor.html

Central banks, economy. The aggressive rebound in global economic growth still isn’t enough for most of the world’s central banks to pull back on their emergency stimulus. https://finance.yahoo.com/news/robust-rebound-won-t-augur-230100088.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAANIO_W4fWKspPdO0lmCF0BtRtybmUhLQrCrS7IiHsU3ox1D7lAQb3Wr7TRZVJl15aCZ4xuL-XKYMkGxjA9ibNTxZoMNfYd4a7dwMtWJG6VTw9RAdKO8fNl33Lu9oNBs6ZyOcLW0nqTwH9A17TmPzaaGMMUFN9VmVdSnCPC9aRR6X

Central banks, economy, pandemic. With a policy change pretty much off the table this week, European Central Bank watchers will have to closely monitor finer details about its pandemic stimulus program as policymakers wait for more data before taking decisive action. https://www.cnbc.com/2021/04/21/european-central-bank-meets-as-covid-lockdowns-complicate-recovery.html

The market opening. The rates to start your day ….

As of 9:40 am EST, Bloomberg reports that the yield on the three-month Treasury note is at 0.03% while the two-year note comes in at 0.15%. The ten-year and thirty-year Treasurys are trading at 1.56% and 2.25%, respectively.

The Federal Funds rate, the rate at which banks lend to each other overnight in support of their reserve requirements, is at .07%, while the Fed Funds target rate is still at .25%. The prime lending rate is 3.25%.

Exchange rates of interest as of 9:55 am EST….

Currency PairsRates as of 9:55 am EST 21 April 2021
EUR/USD1.2024
GBP/USD1.3891
USD/CAD1.2629
CAD/XCD2.1462
USD/XCD2.7000
USD/TTD6.6721
USD/BBD2.0000
CAD/TTD5.3012
CAD/BBD1.5986
Source: OANDA

The Opening Takeaway: Could banks become mere currency agents?

Yesterday I shared my expectations on the possibility of the Federal Reserve, the US Treasury, and other central banks and finance ministries prohibiting cryptocurrency as a medium of exchange. Using the policy rationale of the government being the sole issuer of currency, cryptocurrency issuers may find themselves limited to generating digital assets for sale as investments or safe havens. But what about the banks? What would their role be?

Wall Street appears to be hedging its bets on digital currencies (see second link above) as they prepare for the disruption a central bank issued digital currency could cause. Cryptocurrency exchanges such as Coinbase (Nasdaq: COIN) were receiving big boosts from what appears to be growing acceptance of cryptocurrency as at least a digital asset. Uncertainty in the markets drove capital toward bitcoin and other crypto-assets, making crypto the equivalent of gold in some minds. But with the vaccine rollouts and increases in the number of people, at least in western European countries and the United States on the increase, “risk on” seems to be the quiet rally cry accompanying a pullback in crypto prices. Acompanying the pull back are an increasing number of central banks exploring issuing a digital currency.

One arguable benefit from a central bank issued digital currency is the likelihood of turning more consumers into bank deposit holders. Rather than holding a deposit at a commercial bank, the “unbanked” along with those already holding commercial bank accounts, would have a default account at one of the Federal Reserve’s 12 central banks. yes, more account holders but not necessarily account holders at commercial banks. If the efficiencies promised by a central bank issued digital bank come to fruition, then why bother with holding another account? As part of the payment system, the check I write to and deposit into my son’s account goes through the Federal Reserve’s payment system anyway so why include another middle man? Commercial banks will have to consider these scenarios spawned by digital coin efficiencies when contemplating their new roles.

I see the larger banks easily leveraging their scale to ramp up already existing roles. They could focus more on lending, hopefully in a higher yield environment. They could also lobby for relaxation of Dodd-Frank restrictions on proprietary trading, opening up additional income making opportunities to offset income (if any) made currently from depositors. Large banks will not want to waste investments in their infrastructure by being relegated to mere currency issuer status, competing with check cashing facilities located at Walmart or around the corner at a pawnshop.

For the smaller banks, they will want to leverage their community relationships to counter any new found competition from larger banks as they face the irony of central bank issued digital coin taking away their customers.

Alton Drew