What If You Could Bank With the Federal Reserve?

The banking crisis revived calls to let the public deposit money at the Federal Reserve

United States Federal Reserve building, Washington DC

Richard Sharrocks / Getty Images

Key Takeaways

  • Advocates say letting individual members of the public bank with the Federal Reserve would solve several problems with the banking system. 
  • Banking at the Fed would give the public access to better returns on deposits, faster money transfers, fewer fees, and eliminate the possibility of banking crises, advocates say 
  • Critics say public Fed accounts would carry risks, including decimating existing banks

The collapse of Silicon Valley Bank in March has inspired renewed calls to let individuals bank at the Federal Reserve—which advocates say could offer the public better interest rates, faster transactions, lower fees, and greater confidence their money is safe. 

The banking industry hates the idea. 

How It Could Work

Here’s how it would work, as laid out in a Roosevelt Institute publication about public banking, in which it names this type of bank account FedAccounts. Individuals and businesses could deposit their money at the Federal Reserve—only banks and government bodies can do that now. Depositors could do business in person at post offices, over the phone, or online with the help of an army of customer service representatives that the Fed would have to hire.

Those with FedAccounts would gain access to the Fed’s payment network, allowing instant electronic money transfers, and would get paid the same interest rate that banks currently get on their deposits with the central bank, which is far higher than what banks typically offer. 

Debate on Both Sides

To backers of public banking, the latest banking crisis highlighted how vulnerable the financial system is to repeated shocks and panics that frequently threaten to spill over and hurt the broader economy, and bolstered the case for Fed bank accounts as a solution. The current financial system has pushed back against the proposal at every turn.

A spokesperson for the American Bankers Association, a trade group representing banks, called FedAccounts "a solution in search of a problem" and said it would reduce consumer choice for financial services. Indeed, the Fed bank accounts would be such a good deal for depositors that private banks couldn’t compete, the ABA argued in a 2021 rebuttal to the FedAccount proposal. 

“There is no evidence that the current marketplace is failing to meet the nation’s banking needs,” the ABA spokesperson said in an email. “Having the government intervene in our private banking system will needlessly put taxpayers at risk and reduce the choices available to Americans.”

One leading advocate for public banking paid a political price for her advocacy.  Saule Omarova, law professor at Cornell and vocal critic of big banks, was nominated in 2021 by President Joe Biden to be a top banking regulator, and came under fire from conservatives for her own idea for public banking with the Fed—a plan called “The People’s Ledger.” 

Pennsylvania Republican senator Pat Toomey called her proposals radical and highlighted her upbringing in the then-Soviet Republic of Kazakhstan to accuse her of being a communist. Omarova, whose capitalist credentials include an early career spent working at major Wall Street law firm Davis, Polk, & Wardwell, denied the accusations but was forced to withdraw from consideration for the post. 

Still, Omarova is among the standard-bearers of the latest public banking push. She wrote an op-ed in the Washington Post last month touting FedAccounts as a way to protect the public from bank failures and eliminate the need for the government to step in and bail out the banking system again in the future. 

The FedAccounts plan was developed by Vanderbilt law professor and banking reform advocate Morgan Ricks and Columbia law professor Lev Menand—both former Obama administration officials—and University of California at San Francisco law professor John Crawford in 2018. It was published by the Roosevelt Institute, a progressive think tank where Omarova is now a fellow. In 2020, Senator Sherrod Brown, a Democrat from Ohio, introduced a bill to make FedAccounts a reality to help the government distribute pandemic relief funds more efficiently. (The Banking For All Act never made it out of the Senate’s banking committee.)

Recently, the FedAccounts’ architects, as well as advocates of various other public banking proposals, have taken their case to the financial media in articles in Bloomberg, Yahoo Finance, Marketplace, and others, arguing the time is right to revisit the idea, Proponents say letting individuals put their money in the Fed would make managing money faster and more efficient than the current system, and give currently unbanked people access to financial services without predatory fees imposed by businesses like check-cashing vendors

What Advocates Hope It Might Do

Currently, only banks and governmental bodies can deposit money at the Fed. By law, the central bank is not allowed to offer banking services to individuals. Here’s what advocates say would happen if that were overturned and you were allowed to bank at the Fed, arguably the most secure financial institution in the world: 

You Could Bank at the Post Office Instead of a Bank Branch

Rather than visiting your local bank branch, you could deposit, withdraw, and transfer money at your local post office, or over the Internet. ATMs and other infrastructure would be installed at existing postal facilities. This aspect of the plan harkens back to an earlier era—the Postal Service did in fact offer basic banking services between 1911 and 1967.

You Would Get More Interest on Your Deposits

Money stored in your FedAccount would earn interest at a rate set directly by the Fed, which only commercial banks can currently receive. As of Wednesday, that’s 4.90%. Compare that to the 0.39% rate banks were typically offering for savings accounts as of April, according to FDIC data.

Many banks continue to offer rock-bottom interest rates on savings accounts, and average rates remain low. Still, a smart consumer can get a good deal on certificates of deposit or a high-yield savings account by shopping around.}

The Fed would turn around and lend the money to banks through an expanded version of its “discount window,” Omarova explained in her op-ed—that would preserve the banks’ existing role as lenders, and allow the central bank to give preference to certain kinds of borrowers, such as small businesses or underserved communities.

You Wouldn’t Have To Pay Fees 

Your Fed bank account wouldn’t charge you any hidden fees for the banking services they provided, and there would be no minimum balance requirements. You would also never be dinged with overdraft fees—although you’d also never be able to overdraw your bank account if you needed to.

Advocates say this would make banking more accessible to the estimated 20% of U.S. adults who are currently unbanked or underbanked, and who often turn to expensive alternatives such as pawn shops and check cashers for basic services. 

The Banking System Might Be More Stable

The banking system would be less prone to crises like the bank run that brought down Silicon Valley Bank, advocates say.

“FedAccount would basically eliminate the threat of bank runs because the accounts held at the central bank would be completely secure, regardless of size,” said Emily DeVito, senior program manager of corporate power at the Roosevelt Institute.

DeVito acknowledged things had calmed since the initial wave of turmoil rattled financial markets after SVB’s collapse but said the episode still pointed to the need for FedAccounts. 

“It is good that we have seemingly stabilized after that really acute moment of panic, but the fact that it happened points to some problems in the system that we should address in times of relative stability so that we prevent future chaos and don't wait for it to happen in the future again,” she said.

Since DeVito was interviewed, the failure of San Francisco-based First Republic Bank underscored the ongoing instability in the financial system.

The Bottom Line

No current bills are being debated in Congress and there are no active plans to change the law that prevents the public from banking with the Federal Reserve. But if the law were to change, there is no doubt it would have a massive impact on the banking system as we know it.

Article Sources
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  1. Roosevelt Institute. "Central Banking for All: A Public Option for Bank Accounts."

  2. American Bankers Association. "FedAccounts Issue Update."

  3. The White House. "Statement of President Joe Biden and Nominee for Office of the Comptroller of the Currency Saule Omarova."

  4. Vanderbilt Law Review. "The People's Ledger: How to Democratize Money and Finance the Economy."

  5. YouTube. "Toomey on Senate Floor: I’ve Never Seen a More ‘Radical’ Regulatory Nominee Than Saule Omarova."

  6. Cornell Law School. "Saule Omarova."

  7. Washington Post. "How to make banks safer for depositors and boost free markets, too."

  8. Roosevelt Institute. "Central Banking for All: A Public Option for Bank Accounts."

  9. Senate Banking Committee. "Brown Introduces New Legislation To Help Hardworking Americans In The Coronavirus Relief Package."

  10. Federal Reserve. "Does the Federal Reserve maintain accounts for individuals? Can individuals use such accounts to pay bills and get money?"

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