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Steve Keen: A Manifesto

Published by Anonymous (not verified) on Fri, 05/11/2021 - 5:00pm in

Host, Ross Ashcroft, met up with Keen to discuss his new book, The New Economics: A Manifesto.

The post Steve Keen: A Manifesto appeared first on Renegade Inc.

Steve Keen: A Manifesto

Published by Anonymous (not verified) on Fri, 05/11/2021 - 5:00pm in

Host, Ross Ashcroft, met up with Keen to discuss his new book, The New Economics: A Manifesto.

The post Steve Keen: A Manifesto appeared first on Renegade Inc.

Mutual Banking…

Published by Anonymous (not verified) on Sat, 18/09/2021 - 6:03am in

I think it is worth drawing attention to the latest newsletter of the South West Mutual – a fledgling co-operative bank that is trying to establish itself as the first such institution in the UK. Those that consider we have already a Co-operative Bank are obviously correct – but not in reality – as it... Read more

Why We OccupyOccupy Wall Street: Protecting the People from the Powerful for 10 years!

Published by Anonymous (not verified) on Sat, 18/09/2021 - 5:15am in

Why We Occupy, my talk for Pacifica Radio, is my detailed J’accuse against the 1%. It’s as fresh and relevant today as 10 years ago — a summary of eight of my most crucial investigations into the war between Them and Us. And to celebrate the 10th anniversary of the start of Occupy Wall Street’s occupation of Zuccotti Park, in New York’s financial district, we’re offering ... READ MORE

What about the workers?

Published by Anonymous (not verified) on Mon, 13/09/2021 - 8:58am in

The fact that the HMRC thinks that the recent, proposed National Insurance rises could lead to the breakdown of struggling families means at least that somebody is thinking of them, even if, remarkably, it is only the UK’s tax authority. (Government seem to have ceased to take either workers or struggling families into account.) I... Read more

JP Morgan's Coffee Machine

Published by Anonymous (not verified) on Sat, 04/09/2021 - 2:41am in


banks, money


It's now widely accepted, though still not universally, that banks create money when they lend. But it seems to be much less widely known that they also create money when they spend. I don't just mean when they buy securities, which is rightly regarded as simply another form of lending. I mean when they buy what is now colloquially known as "stuff". Computers, for example. Or coffee machines. 

Imagine that a major bank - JP Morgan, for example - wants to buy a new coffee machine for one of its New York offices (yes, it has more than one). It orders a top-of-the-range espresso machine worth $10,000 from the Goodlife Coffee Company, and pays for it by electronic funds transfer to the company's account. At the end of the transaction JP Morgan has a new coffee machine and Goodlife has $10,000 in its deposit account. 

What exactly is this money, and how is it created? I had a long argument with people on twitter who insisted that JP Morgan would pay for the coffee machine with reserves. JP Morgan can't create reserves, it can only borrow or buy them. So if JP Morgan pays for the machine with reserves, the reserves must already exist. No new reserves will be created in the course of this transaction. 

But only banks can accept reserves, and Goodlife is not a bank. So although JP Morgan may pay with reserves, what Goodlife actually receives is bank money. As I shall show, this money is newly created in the course of the transaction.  

In fact, JP Morgan does not necessarily pay with reserves anyway. Whether reserves are involved in this transaction at all depends on who Goodlife banks with.

Suppose Goodlife banks with JP Morgan. All JP Morgan has to do is put $10,000 into Goodlife's account and take delivery of the coffee machine. The balance sheet entries are as follows:

JP Morgan

Fixed assets                DR $10,000   (coffee machine)

Customer deposits      CR $10,000   (credit to  Goodlife business deposit account)


Inventory                    CR $10,000 (coffee machine)

Cash at bank               DR $10,000 (increase in balance at business deposit account)

There is no reserve transfer in this transaction. Reserves are used only to transfer funds between banks, so since Goodlife banks at JP Morgan, reserves are not needed. JP Morgan pays for the coffee machine with newly-created bank money, not with pre-existing reserves. 

A full balance sheet analysis would show that JP Morgan'e equity has reduced as a proportion of total assets. In effect, JP Morgan has paid for the coffee machine from its own equity. 

So why did my twitter friends say JP Morgan paid for the coffee machine with reserves? Well, they were assuming that Goodlife didn't bank with JP Morgan. In this scenario, JP Morgan must transfer reserves to Goodlife's bank. 

To show how this works, let's assume Goodlife banks with Citibank. The accounting entries for the two banks and Goodlife now look like this: 

JP Morgan

Fixed assets                DR $10,000 (coffee machine)

Reserves                     CR $10,000 (payment to Citibank)


Reserves                     DR $10,000 (payment from JP Morgan)

Customer deposits      CR $10,000  (credit to Goodlife business deposit account)


Inventory                    DR $10,000 (coffee machine)

Cash at bank               CR $10,000 (increase in balance at business deposit account)

 As far as Goodlife is concerned, JP Morgan has paid for the coffee machine with bank money. But in fact, JP Morgan has transferred reserves to Citibank, and Citibank has created a new deposit in Goodlife's account. So from JP Morgan's point of view, it has paid for the coffee machine with reserves. 

Note that in this case, the entries for JP Morgan, like those for Goodlife, are entirely on the asset side of the balance sheet. In effect, JP Morgan has exchanged reserves (asset) for a coffee machine (asset). Its balance sheet has not increased in size and its equity buffer is unchanged. 

But Citibank's balance sheet has increased in size. It has new reserves (asset) of $10,000 and has created a new customer deposit (liability) of $10,000. Its equity buffer is now smaller as a proportion of total assets. Citibank has increased its leverage to accommodate JP Morgan's purchase of a coffee machine. 

In both scenarios, new bank money is created when JP Morgan buys a coffee machine. But in the second scenario, the new money is created on behalf of JP Morgan by Citibank. Citibank in effect acts as JP Morgan's settlement agent. 

Now, lots of you will no doubt tell me that Citibank must create Goodlife's deposit when it receives reserves from JP Morgan, because otherwise its books won't balance. Sadly it's not quite so simple. The accounting above leaves out perhaps the most important part of all payment transactions - the messages that banks send to each other. 

Messaging is the untold story of payments. "JP Morgan pays for its coffee machine with reserves" is technically true, but it's only half the story. What JP Morgan actually does is send Citibank a message instructing it to pay for the coffee machine with its own money, and transfers reserves to Citibank in compensation. It's rather as if I ask you to go and buy me a pastrami sandwich and a latte. You pay out of your own pocket and I reimburse you when you deliver my lunch. 

So, JP Morgan instructs Citibank to credit Goodlife's account with $10,000. On receiving this message, Citibank increases the ledger balance on Goodlife's account by $10,000. At this point the reserve transfer has not been completed, and it might not complete for some hours or even days. But Goodlife can see the money in its Citibank account, and on that basis, delivers the coffee machine. 

However, banks are far more canny than people. If you were a bank, you wouldn't let me eat the lunch you bought me until I had paid you. Or if you did allow me to eat before paying, you would charge me interest on every mouthful. So Goodlife can't access its money until the reserve transfer from JP Morgan has completed. Citibank might allow Goodlife to "draw" on its uncleared balance, but this is actually lending. It's a short-term overdraft secured on the collateral of the anticipated payment. And Citibank would charge interest on it. Banks never knowingly pass up a chance to make money.

Messaging can go wrong, with unfortunate effects. This is more likely in international payments, which are by definition  complex and risky. But it's not unheard-of in domestic payments. Suppose the message from JP Morgan fails to arrive, perhaps because of a systems outage. Citibank receives the reserves, but it doesn't know that it has to put money in Goodlife's account. So it creates an entry in an "unidentified items" account. JP Morgan thinks it has paid, but Goodlife has not received the momey. There ensues a flurry of emails between an angry bank that thinks it has been defrauded of $10,000 and an equally angry coffee machine supplier that thinks its customer has failed to pay for goods it has ordered. 

Similarly, if the message contains wrong instructions - "pay $10,000 to Chris' Coffee", for example - the money goes astray even if the reserve transfer completes correctly. Transferring reserves is not by itself sufficient to complete the coffee machine transaction. 

Whenever a bank buys something from a non-bank, new money is created. That is true whether or not the transaction involves a reserve transfer between banks. Focusing only on reserve transfers, and ignoring the vitally important role of payment messages and bank deposit creation, entirely misses the point. 

Related reading:

Money creation in the modern economy - Bank of England

Image: By Takeaway - Own work, CC BY-SA 4.0,

Many thanks to Goodlife Coffee Company and Chris' Coffee for allowing me to take their names in vain. I hope this piece drives some genuine business to their long-suffering sites. 

Too busy in the City – versus the advantage of local banks

Published by Anonymous (not verified) on Thu, 19/08/2021 - 9:14am in

There is an interesting new interview from Renegade Inc with Professor Richard Werner: Presenter, Ross Ashcroft quotes: “As the Russian Proverb goes: There is nothing more permanent than a temporary solution.”  And that is Quantitative Easing (QE), which term of course Richard Werner invented. But now, more important, I’d suggest are his ideas on local... Read more

“Excess Savings” Are Not Excessive

Published by Anonymous (not verified) on Wed, 11/08/2021 - 11:55pm in

Florin Bilbiie, Gauti Eggertsson, Giorgio Primiceri, and Andrea Tambalotti


How will the U.S. economy emerge from the ongoing COVID-19 pandemic? Will it struggle to return to prior levels of employment and activity, or will it come roaring back as soon as vaccinations are widespread and Americans feel comfortable travelling and eating out? Part of the answer to these questions hinges on what will happen to the large amount of “excess savings” that U.S. households have accumulated since last March. According to most estimates, these savings are around $1.6 trillion and counting. Some economists have expressed the concern that, if a considerable fraction of these accumulated funds is spent as soon as the economy re-opens, the ensuing rush of demand might be destabilizing. This post argues that these savings are not that excessive, when considered against the backdrop of the unprecedented government interventions adopted over the past year in support of households and that they are unlikely to generate a surge in demand post-pandemic.

Calculating excess savings is simple: they are the cumulative amount by which personal saving during the pandemic has exceeded a counterfactual path without COVID-19. As shown in blue in the chart below, personal saving has been elevated since last March. The red line represents one plausible counterfactual scenario, in which the saving rate out of disposable income is constant at its pre-pandemic level (7.3 percent), while disposable personal income grows at its average rate over the previous twenty years (3.5 percent). Excess savings are the area between the two lines. According to this calculation, they amounted to $1.6 trillion as of December 2020. Different plausible assumptions on the counterfactual evolution of personal saving in the absence of the pandemic lead to relatively small differences in this headline number.

“Excess Savings” Are Not Excessive

Where do these excess savings come from? Three contributing factors are clear. First, many Americans have thankfully kept their jobs and incomes over the past year. However, they have not spent nearly as much as they would have otherwise, because they are not dining out or going on vacation due to the pandemic. Increased purchases of furniture, electronics, and other goods have compensated only in part for this reduced spending on services. As a result, overall consumption has fallen for many households, even if their income is more or less intact. Second, starting with the emergency response approved in early March and the subsequent CARES Act, the government has stepped in to replace some of the lost income, especially for workers in the sectors hardest hit by the pandemic. Some of this income support was spent to keep food on the table and a roof over the heads of many families, but not all of it was. Third, it is possible that households decided to save more than usual as a precautionary measure, given the great uncertainty about their jobs and the overall health of the economy going forward.

Regardless of the precise reasons, there is no doubt that households saved more in the past year than they would have in a world without the pandemic. But is there anything “excessive” about the savings that they have thus accumulated? Are these moneys significantly different from the other $130 trillion in net worth that U.S. households already own, in a way that might lead them to be spent faster than other components of wealth? There are at least three reasons to think that the answer to this question is no.

Excess savings are the accounting counterpart of “extra” government debt. According to the principles of national income accounting, the flow of private saving (by households and businesses) must be channeled to one of three uses. It can finance investment, be lent abroad, or lent to the government. In 2020, the U.S. government spent roughly $2 trillion to fight the COVID-19 recession, most of it financed with debt. The $1.6 trillion in “excess savings” is the accounting counterpart of this increase in government borrowing.

As is often the case with accounting identities, this observation has limited economic implications. It does not reveal why households accumulated the “excess savings,” nor whether they will spend them once the economy fully re-opens. Nonetheless, it helps us to consider them under a different light—not as “extra” resources ready to be spent, but as the flip side of the extraordinary fiscal effort to fight the COVID-19 pandemic.

Excess savings are mostly held by…savers. One reason why many economists do not associate the exceptional increase in government debt over the past year with an imminent explosion in aggregate demand—even though they might worry about it for a host of other reasons—is the idea that government debt is money that citizens owe to themselves. As such, it would not represent “net wealth” that is ready to be spent. In economics jargon, this idea is known as Ricardian Equivalence. According to this proposition, public transfers financed with government debt do not affect consumption because households save them to pay for the increase in taxes that will eventually be necessary to repay that debt. If Ricardian Equivalence held, the marginal propensity to consume out of debt-financed transfers would be zero, and the resulting savings would never be spent.

Ricardian Equivalence is the kind of theoretical benchmark that economists love, but it clearly does not hold in practice. In fact, many U.S. families did spend a significant share of the checks and other income support that they received during the pandemic. According to available estimates, this share is around one-third on average. The rest was used to pay down debt (also about one-third) or otherwise saved. It is hard to know exactly who holds these savings, but it seems reasonable to assume that they are individuals and families with a bit of a buffer in their budgets—and whose consumption decisions are therefore less sensitive to their immediate economic circumstances. This is presumably what allowed them to save part of the support they received. According to economic theory, these savers are more likely to be Ricardian, and hence to continue holding on to these savings. Of course, their economic circumstances might change in the future and they might find themselves in need to spend those accumulated resources, but the end of the pandemic in itself is unlikely to turn them from savers to immediate spenders. If anything, fewer households should face financial hardship as aggregate conditions improve.

Excess savings are unlikely to unleash pent-up demand for services. One caveat to the previous reasoning is that some of the “excess savings” might be due to a dearth of spending opportunities in the sectors of the economy most affected by the virus, such as travel and entertainment. If this is true, some of that lost spending could materialize once those sectors fully re-open.

How large is this “pent-up” demand for services likely to be? On the one hand, there is little doubt that many consumers will enjoy a few extra restaurant meals and perhaps splurge on a nicer vacation after such a long period without them. On the other hand, there is a limit to how many extra restaurant meals and vacations people will be able to enjoy. To have a sense of how much of this pent-up demand might be activated by the “excess savings” accumulated during the pandemic, recall that available estimates of the propensity to consume out of the CARES Act transfers is about one-third. This means that the average household spent about 33 cents out of each dollar received in direct payments. As it turns out, this estimate is in line with those based on previous transfers of this kind, such as the Economic Stimulus Payments of 2008. Therefore, the pandemic does not seem to have substantially limited households’ ability to spend the support that they received.

The bottom line from these three sets of considerations is that, although large by historical standards, the savings accumulated by U.S. households during the pandemic do not appear to be “excessive” when set against the extraordinary need of many American families and the unprecedented government intervention to support them. It is certainly possible that some of these savings will pay for extra travel and entertainment once the COVID-19 nightmare is behind us, but our conclusion is that the resulting boost to expenditures will be limited. This conclusion does not rule out a strong economic recovery from the virus shock. It only implies that spending out of excess savings won’t be one of its major drivers.

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Florin Bilbiie is a professor of economics at the University of Lausanne, Switzerland.

Gauti Eggertsson is a professor of economics at Brown University.

Giorgio Primiceri is a professor of economics at Northwestern University.

Andrea TambalottiAndrea Tambalotti is a vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

How to cite this post:

Florin Bilbiie, Gauti Eggertsson, Giorgio Primiceri, and Andrea Tambalotti, “’Excess Savings’ Are Not Excessive,” Federal Reserve Bank of New York Liberty Street Economics, April 5, 2021,


The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Print & Inflate – Now Tax The Poor Some More

Published by Anonymous (not verified) on Fri, 06/08/2021 - 3:02pm in

Weird economics Over recent decades Western societies have witnessed arguably the greatest monetary experiment of all-time presided over by central bankers committed to neoclassical economics. What Frank Shostak terms “weird economics”, is predicated on an ignorance of the key factor that underpins inflation, namely increases in the money supply. Shostak says that because inflation has […]

The post Print & Inflate – Now Tax The Poor Some More appeared first on Renegade Inc.

Banking the Unbanked: The Past and Future of the Free Checking Account

Published by Anonymous (not verified) on Fri, 30/07/2021 - 8:18am in

Stein Berre, Kristian Blickle, and Rajashri Chakrabarti

 The Past and Future of the Free Checking Account

About one in twenty American households are unbanked (meaning they do not have a demand deposit or checking account) and many more are underbanked (meaning they do not have the range of bank-provided financial services they need). Unbanked and underbanked households are more likely to be lower-income households and households of color. Inadequate access to financial services pushes the unbanked to use high-cost alternatives for their transactional needs and can also hinder access to credit when households need it. That, in turn, can have adverse effects on the financial health, educational opportunities, and welfare of unbanked households, thereby aggravating economic inequality. Why is access to financial services so uneven? The roots to part of this problem are historical, and in this post we will look back four decades to changes in regulation, shifts in the ownership structure of retail financial services, and the decline of free/low-cost checking accounts in the United States to search out a few of the contributory factors.

The Unbanked
The economics of banking do not incentivize the delivery of financial services to those who may need them most. Since profits at retail banks are driven heavily by the size of the balances their customers deposit or borrow, product offerings and marketing efforts are disproportionately focused on clients with higher levels of income and wealth. Checking accounts display the characteristics of a good that has a high degree of income elasticity for lower-income households. In other words, a checking account is a good that lower-income households may choose to forego if household budgets are tight (as during a spell of unemployment); meanwhile, checking accounts have near-universal penetration among wealthier households. For a subset of consumers, estimated by the FDIC in 2019 to be just over 5 percent of the population, basic account access remains lacking, particularly among those with irregular incomes, less documentation, and a lack of credit history.

Significantly, almost half of this unbanked group previously had bank accounts and now choose not to have one. Reported factors in this decision include distrust of banks, high fees, or large minimum balances. Although the size of the unbanked population has been falling over time, it tends to go up and down with the state of the economy and level of employment, having recently peaked at 8.2 percent of U.S. households in 2011 and risen again as the result of the pandemic, underscoring that for poorer households, checking accounts are often a good they choose to forego when income falls.

Those without bank accounts still need financial services, including money transfer and credit. According to research by Mehrsa Baradaran on low-earners in How the Other Half Banks, expenditure on financial services by unbanked households could amount to as much as 10 percent of their income. Often, this spending is due to high interest rates (on such services as payday loans), wire fees (especially for those providing or receiving remittances), or overdraft/transaction fees on transaction accounts.

Low-cost, low-minimum bank accounts were once widely available in the United States. In the 1960s and 1970s, an era of regulated deposit pricing, banks competed for new depositors through aggressive advertising and incentives (the proverbial toaster) and offered low-fee checking accounts with low or no minimum balance requirements. Customers with larger balances cross-subsidized those with smaller balances, since the cost of servicing smaller accounts was often greater than the revenues they generated. The repricing of this era was concurrent with the Savings and Loan Crisis and the associated declines in financial inclusion and access to low-cost financial services products have continued to this day.

This post looks at some historical factors that accompanied changes in the supply of checking accounts to low- and moderate-income households in the United States. Part of this change in supply was structural, as institutions that had been founded to serve low- and middle-income communities either changed strategy or were acquired. Other changes happened at a product and customer level as banks reduced the cross-subsidies from higher-balance customers to lower-balance ones through minimum balance requirements, increased account fees, and overdraft charges.

Comparative Market Structure
All countries face challenges in achieving full financial inclusion, but the United States is relatively unusual among richer countries in the size of its unbanked and underbanked population. In neighboring Canada, for example, more than 99 percent of the population has access to a basic transaction account, including 98 percent of the poorest 40 percent of the population. Japan, Germany, Singapore, and the countries of Scandinavia show similar levels of access. The FDIC’s 2019 Survey of Household Use of Banking and Financial Services, in contrast, showed that about a quarter (23.3 percent) of U.S. households with annual incomes of less than $15,000 were unbanked, as were 10.4 percent of households earning between $15,000 and $30,000.

The United States is also somewhat unusual among wealthier countries in the scale of its not-for-profit banking sector. The United States does not have a universal Giro- or Postbank, as in much of Europe or Japan, and although it does have a vibrant credit union sector (accounting for about 8 percent of all banking assets), the mutual banking sector is smaller than in many other OECD nations.

This was not always the case. As recently as the 1970s, mutuals (thrifts, mutual savings and loans [S&Ls], and affinity-based mutuals) accounted for half of the residential lending market and commanded a significant share of the deposit market. A large number of these mutual banks were founded in the late 19th and early 20th centuries with the goal of ensuring financial inclusion for the working poor, at a time in which banking services were provided primarily to the well-to-do. Their missions were sometimes rooted in communitarian self-help and sometimes in paternalist philanthropy. Mutual savings and loans were present in most parts of the country and savings banks were once particularly prevalent in the cities and towns of the northeastern United States. Fraternal and friendly societies, including provident societies, also provided financial services as part of lodge, club, or church membership.

FRED data show the rapid decline of mutual banks in the U.S. banking market, both in terms of their number and their assets. In the chart below, the rapid fall in the deposit share of mutuals between 1985 and 1995 is particularly apparent. Many of these organizations still exist, but are no longer mutual-based, having demutualized or been acquired by for-profit commercial firms and migrated upmarket along with their customer base.

 The Past and Future of the Free Checking Account

While traditional mutuals have declined, there has been a revival since the 1980s in credit unions. Like the mutual savings banks and savings and loans, credit unions have a mutual structure, more akin to a not-for-profit, usually linked to some form of employer, professional affiliation, or local geography. While credit unions have grown their deposit
base at nearly 7 percent per annum on average since the 1980s, nominal growth of other mutuals (savings banks, S&Ls) has been negligible.

Over this same period (since 1989), commercial banks have grown in scale and scope, with total deposits growing from $2 trillion to over $17 trillion today. The acquisition wave that began in the 1980s has been associated with a commercial banking sector that is dominated by regional and national banking networks, which market themselves based on brand and convenience and do not generally compete on price in the market for retail deposits. The top four banking groups now account for more than 35 percent of U.S. commercial bank deposits.

The Great Repricing
Many factors came together in the 1970s and 1980s as banks began differentiating between higher- and lower-balance customers. Because deposit markets in this era were still very local and data on retail deposit pricing was just beginning to be widely available, we rely here on press and other primary sources’ descriptions from that era. In exploring why price differentiation grew in the 1980s and 1990s, we describe some of those factors, but we think of these as correlates, not proof of causality.

Through their exposure to short-term interest rates, money market mutual funds offered savers higher rates and greater protection against inflation than demand deposit accounts could offer, as they were subject to Regulation Q restrictions on the payment of interest. To compete, banks launched a high-interest account with limited transactions allowed per month, the NOW Account (Negotiated Order of Withdrawal). These products were approved for rollout nationwide in 1980 by an act of Congress and a 5 percent interest rate cap was lifted in 1986.

These products were widely popular with customers, but much less profitable on average than checking accounts had previously been. In the years following the introduction of the NOW account, banks searched for ways by which they could still offer interest on checking accounts without losing revenue. Banks instituted higher fees on lower balance customers and relatively high account minimums to ensure break-even for this new product. These balances (typically ranging on the order of $1,000 minimum balance at commercial banks, and around $300 at thrifts, such as savings banks and S&Ls) were publicly justified by bankers arguing that higher minimum balances reflected the increased break-even point on interest-paying deposits.

There was extensive writing about these new accounts both within the press and in the burgeoning industry of saver-oriented consumer reporting. In 1983, the New York Times reported that account fees had more than doubled since the start of the decade and minimum balances for fee waivers, as high as $2,500 in some local markets, had been introduced. A few years later, Sheshunoff, a leading publisher of deposit product comparisons, reported that transaction fees on checking accounts nearly doubled yet again in many of the markets it covered between 1985 and 1988.

In parallel, as changes in the deposit market intensified, mutual banks came under a long and painful period of financial stress on their lending portfolios. The causes and impacts of the waves of bank failures triggered by the Savings and Loan Crisis are covered in an extensive literature of their own. Many mutuals failed, converted, or were acquired in this period, but their deposits and branch infrastructure still made them attractive acquisition targets.

Throughout the 1980s and early 1990s, through both voluntary and arranged mergers, struggling mutuals were among the first retail players to be consolidated in the two and a half decades of retail banking consolidation that followed. The loss of the mutuals reduced the options available to low-balance customers, particularly in the regional markets of the northeast where they had historically been strongest. Mutuals tended to have lower minimum balance requirements and lower fees. Studies from the period also show that commercial banks with large branch networks also tended to pay lower rates on deposits than either community banks or mutuals did.

Due in no small part to increased computing power and growing sophistication in cost-accounting, customer-level profit segmentation became a lens through which banks have looked at retail customers, not only in banking but across a wide range of industries since the late 1980s. Banks needed to know what products to target at which customers and where the break-even points would be on each product, leading to changes in the way retail banks were managed at the customer level. A bibliography of some of this literature can be found here.

With profitability segmentation, bank clients could be divided into “A,” “B,” and “C” tiers (“A” being the most potentially lucrative, but the terms will vary by firm) based on current balances and potential future profit. Higher balance “A” customers tend to cover more than their allocated share of bank expenses and make a large contribution to bank profits; customers in the “B” and “C” tiers tend to make a marginal or negative contribution. Consequently, lower tier clients saw an increase in account service and overdraft fees, so that they would be more profitable on a stand-alone basis. In more recent years, higher overdraft charges have continued this trend of imposing fees to make lower-balance customers more profitable.

There may be signs of change in the market. Fintech firms are increasingly offering low-cost checking account options in a marketplace less tied to costly brick-and-mortar infrastructure. As of this posting, some major banks have also begun announcing an end to some or all overdraft fees on retail accounts (although other fees will likely stay in place). This may or may not be a longer-term trend, but it would go some way toward addressing one of the most clear-cut cases of product pricing impacting low-balance customers.

The following post in this series will dive more deeply into the dynamics of account overdraft fees and their implications for inequality.

Summing Up
The great repricing of bank products that began four decades ago has been associated with profound changes in financial inclusion. Compared to that earlier era, there are fewer institutions offering low-minimum, low-fee accounts and retail deposit and transaction products are more differentiated based on balances, with the associated fees hitting lower-balance customers hardest. As a result, a substantial number of low- and middle-income consumers choose to be unbanked to avoid fees, a figure that rises when the economy is not performing well. Loss of access to a transaction account can have knock-on effects in terms of inequality, particularly through the mechanism of credit access, banking relationships, and credit histories. Greater availability of low-cost checking accounts, by this logic, would translate into higher rates of inclusion in what is arguably the cornerstone product for inclusion in the economy.

If the past is prelude, this leads us to think about alternative futures. Will traditional banks increasingly forego fees and allow greater cross-subsidization between customer segments? As many credit unions offer increasingly liberal terms for membership, will they help fill the gap for financial inclusion? Alternatively, will technology fill the void, enabling banks or fintechs to serve clients that are currently high-cost much more cheaply so that there are very few “C” customers left? Or perhaps, as was the case a century ago, it is time for mission-driven organizations to think again about mutual banking?

Stein BerreStein Berre is a senior vice president in the Federal Reserve Bank of New York’s Supervision Group.

Kristian BlickleKristian Blickle is an economist in the Bank’s Research and Statistics Group.

Rajashri ChakrabartiRajashri Chakrabarti is a senior economist in the Bank’s Research and Statistics Group.

How to cite this post:
Stein Berre, Kristian Blickle, and Rajashri Chakrabarti, “Banking the Unbanked: The Past and Future of the Free Checking Account,” Federal Reserve Bank of New York Liberty Street Economics, June 30, 2021,
Additional Posts in this Series
Hold the Check: Overdrafts, Fee Caps, and Financial Inclusion
Credit, Income, and Inequality

Related Reading
Once Upon a Time in the Banking Sector: Historical Insights into Banking Competition
The ‘Banking Desert’ Mirage
Economic Inequality: A Research Series

The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.