Something struck me this morning:

1. Short term treasuries are yielding 0%

2. All of the investment banks are now bank holding companies

3. The Fed pays interest on (required and excess) reserves

No investment bank should have any money in short term treasuries. Instead, they should create a bank with 100% reserves. The bank wouldn’t exist much beyond the trading desk at the investment banks (this isn’t altogether different than the online-only banks). They’d receive non-zero interest on their deposits. There’s no risk of bank failure for a bank with 100% reserves (other than management failure, which is controlled by the investment bank and therefore equal to a trading manager’s failure).

There are hundreds of billions of dollars earning zero percent. The cost of regulatory compliance for a bank with 100% reserves is less than the interest paid on reserves (this is particularly true now that everyone and their mothers are already bank holding companies). This money could all be earning that wonderful quarter of a percentage point. Also, an arbitrage opportunity for the investment banks exists until the short term treasuries yield rises to meet the interest on reserves rate (short the short-term treasuries, deposit money into their own bank).

When I was a teenager, I thought of other things while in the shower…