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November 24, 2013 7:00 pm

US banks warn Fed interest cut could force them to charge depositors

Leading US banks have warned that they could start charging companies and consumers for deposits if the US Federal Reserve cuts the interest it pays on bank reserves.
Depositors already have to cope with near-zero interest rates, but paying just to leave money in the bank would be highly unusual and unwelcome for companies and households.
The warning by bank executives highlights the dangers of one strategy the Fed could use to offset an eventual “tapering” of the $85bn a month in asset purchases that have fuelled global financial markets for the last year.

Minutes of the Fed’s October meeting published last week showed it was heading towards a taper in the coming months – perhaps as soon as December – but wants to find a different way to add stimulus at the same time. “Most” officials thought a cut in the interest on bank reserves was an option worth considering.
Executives at two of the top five US banks said a cut in the 0.25 per cent rate of interest on the $2.4tn in reserves they hold at the Fed would lead them to pass on the cost to depositors.
Banks say they may have to charge because taking in deposits is not free: they have to pay premiums of a few basis points to a US government insurance programme.
“Right now you can at least break even from a revenue perspective,” said one executive, adding that a rate cut by the Fed “would turn it into negative revenue – banks would be disincentivised to take deposits and potentially charge for them”.
Other bankers said that a move to negative rates would not only trim margins but could backfire for banks and the system as a whole, as it would incentivise treasury managers to find higher-yielding, riskier assets.
“It’s not as if we are suddenly going to start lending to [small and medium-sized enterprises],” said one. “There really isn’t the level of demand, so the danger is that banks are pushed into riskier assets to find yield.”
The danger of negative rates has deterred the Fed from cutting interest on bank reserves in the past. If it were to do so now, it would most probably expand a new facility that lets banks and money market funds deposit cash at a small, positive interest rate. That should avoid any need for banks to charge depositors.
About half of the reserves come from non-US banks that do not have to pay the deposit insurance fee. Their favourite manoeuvre is to take deposits from money market funds and park them overnight at the Fed, earning millions of dollars risk-free. Cutting the interest on reserves would stop that.
Lowering interest on reserves would also affect money market funds, said Alex Roever, head of US interest rate strategy at JPMorgan.
“[It] would decrease the incentive for those banks to borrow in the money markets, which in turn could leave money market funds short of certain investments and force them to bid up the price of their next best options,” he said.
Richard Gilhooly, strategist at TD Securities, highlighted some benefits to the Fed from the possible cut: “[It] would not only anchor short-term rates near zero, it also stands to boost the profits for the Fed as they pay less interest to banks,” he said.

QE. ZIRP noose is tightening quickly now

the arrogance of banks is just unbelievable

This article just made my day! All i can see now are dollar signs!!!!!

Haha! The next thing will be imposing tax on USD in your assets. Worldwide :)

The whole banking system is sinking in shit.

I wonder who are all those depositors that keep their money in banks at a near-zero interest rate? What sense does it make if you could just as easily (well, almost) buy US treasury bills (e.g. through TreasuryDirect) which are the safest dollar-based investment out there, thus securing yourself from a bank's arbitrariness?

Or do I miss something?

i think this is just an empty threat.. banks are just crackbabies who have been fed so much crack that they can threaten to break their own leg (if the fed doesn't feed them more).

slow clap - feel free to join me.

Thomas Jefferson had it right when he said he feared banking institutions more than standing armies. The sooner we all leave the world of banks the better.

Conspiracy theory: Someone at the Fed is sitting on a load of bitcoins, and he set all of this up in order to force the following chain of events: banks charge customers for deposits -> customers withdraw all money -> customers need a new place to put their money -> buy bitcoin paper wallets -> price of bitcoin shoots up -> the guy hoarding bitcoin who originally suggested decreasing the interest rates to the Fed is now rich.

I doubt they would do this. It's suicide for them if they do.

Treasury bills only make sense if you own a disproportionate share of them, or aren't paying U.S. taxes. The money for those interest payments has to come from somewhere, and that somewhere is a mix of inflation and future taxes. If you are an average U.S. citizen paying U.S. federal taxes, you might as well just keep your money at zero interest rather than taking out a T-bill and paying back your own interest--at least you'd save on overhead.

Or from another point of view, if you really think T-bills will give you a net gain, those T-bills are being paid back from other people's taxes--which means you're investing in and enabling a textbook protection racket. ("Pay your taxes and we'll protect you from the bad guys. If you don't pay them, what you mainly have to worry about is us.")