The Federal Reserve found itself on the wrong end of legal action in September, facing accusations of limiting competition in order to serve the interests of big banks at the expense of their customers.
The serious accusations were made in a lawsuit filed by a former Fed official. His lawsuit accuses Jerome H. Powell – the Fed chairman – of squashing his idea to create a new bank -TNB USA- that would not make loans; instead, “it would put all of its customer deposits into an account at the New York Fed (Source: “Federal Reserve Is Sued, Accused of Limiting Competition“, The New York Times).
According to James McAndrews, the plaintiff in the case, he was given the impression his bank’s application would be approved only to be denied shortly afterward “at the specific direction of the Board’s Chairman” (Mr. Powell).
Was this decision made in order to limit competition, as alleged in the lawsuit? The Fed has not made any statements other than to confirm that they are aware of the lawsuit. Meanwhile, critics of the McAndrew’s proposal for the new bank could cause instability by drawing customers away from banks with a broader portfolio of services, particularly customers looking for a safe place to park their deposits.
This is an important case to keep an eye on, as its implications for investors and financial institutions could be far reaching.