10.3 Loophole Mining and Lobbying #Notebook

 10.3 Loophole Mining and Lobbying #Notebook

Financiers responded by developing money market mutual funds (MMMFs), which offered checking account, like liquidity while paying interest at market rates, and by investing in short-term, high-grade assets like Treasury Bills and AAA-rated corporate commercial paper. 

Nonbank banks

Since the law defined banks as institutions that “accept deposits and make loans,” banks surmised they could establish de facto branches that did one function or the other, but not both. This loophole mining is less economically efficient than establishing real branches.

Sweep accounts, checking accounts that were invested each night in overnight loans, allowed banks to do the end around on reserve requirements, legal minimums of cash and Federal Reserve deposits. 

Bank holding companies (BHCs), and banking-related service companies, offered bankers another way to use loophole mining because regulation of BHCs was more liberal. BHCs could circumvent restrictive branching regulations and earn extra profits by providing investment advice, data processing, and credit card services. J.P. Morgan Chase, Bank of America, and Citigroup are all BHCs.

Reference
Wright, R.E. & Quadrini, V. (2009). Money and Banking. Saylor Foundation. Licensed under Creative Commons Attribution-NonCommercial-ShareAlike CC BY-NC-SA 3.0 license.