The most direct and immediate impact is likely to be felt in short-term funding markets. Commercial-paper rates are likely to be nudged higher as TNB’s deposit rate acts as a de facto floor for money-market rates. After all, why would an institutional investor be willing to accept a lower yield for securities that also carry credit risk? Even rates on repurchase agreements and Treasury bills would likely face upward pressure as higher yields spill over, strategists say.

The rate on one-day AA rated financial commercial paper was 2.16 percent on Oct. 19, while overnight general collateral repo rates stood at 2.26 percent, and one-month Treasury bills yielded 2.18 percent, data compiled by Bloomberg show. The narrow bank’s deposit rate would presumably be set slightly lower than the interest the Fed pays on excess reserves -- currently 2.20 percent -- to account for its operating expenses and profit margin.

“It’s a clever idea, and one that sets up a precedence for other banks to do the same sort of thing,” said Raymond Stone, a Rutgers University finance professor who was a New York Fed researcher in the 1970s. “You could argue it’s exploiting the program of interest on reserves in a way to get other people, who are non-banks, something closer to the IOER.”

Win for Savers

McAndrews envisions even broader ripple effects. Higher rates for institutional investors such as money-market funds will fuel competition in the banking sector for deposits, forcing lenders to increase what they offer retail customers, he says.

Americans have faced extremely low rates on their savings for years in wake of the Fed’s unprecedented crisis-era monetary easing. Although policy makers have begun to ratchet up their fed funds rate target -- which is now between 2 percent and 2.25 percent -- banks have been slow to pass along the benefits. Only about 20 percent of Fed tightening has found its way to depositors since the central bank started raising rates in 2015, Joseph Abate, a money-market strategist at Barclays Plc, wrote in a note last month.

“How much this could affect money-market rates depends on by what degree TNB is successful and how much its model is replicated by other firms,” said Seth Carpenter, chief U.S. economist for UBS Securities Inc. and a former senior adviser at the Federal Reserve Board of Governors. “If big institutional clients and non-financial corporations place cash with a narrow bank, they will take it from either money market funds or commercial banks. That could force banks to compete by lifting deposit rates, and money funds to sell securities, which will lift bill yields.”

The narrow bank has been granted a temporary certificate of authority by regulators in Connecticut, but still needs access to a master account at the Federal Reserve Bank of New York, which it’s been waiting on for more than a year now.

The reasons for the delay aren’t particularly clear, though in a letter to the court last week the New York Fed said TNB raises major “policy concerns,’’ and asked the U.S. district judge overseeing the case to reject the argument that the Fed is required by law to grant access to the upstart bank. The Fed has until Oct. 26 to formally respond to TNB’s legal action.

Suzanne Elio, a spokeswoman for the New York Fed, declined to comment.