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.Excess 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.
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.
Free Money Math
The Fed pays .25% interest on excess reserves.
A quarter of a percent on $2.4 trillion happens to be $6,000,000,000 (six billion) annually.
Time for Banks to Be Banks, Not Hedge Funds or Slush Funds
Printing money that just sits overnight at the Fed allowing banks to make risk-free profits on $2.4 trillion in excess reserves is of course ridiculous.
It is also ludicrous for banks to complain about the take-away of free money that it should not be getting in the first place.
The Fed has so distorted the economy that no true pricing mechanism exists on anything.
Should banks feel the need to charge depositors interest on deposits, then so be it. That's the way it should be in the first place.
100% Gold Backed Dollar
In a true free market economy, with a 100% gold-backed dollar (where one dollar represented a fixed amount of gold, as opposed to a fixed price of gold), banks would of course charge a fee for safekeeping and other services.
The closer we get to that model the better, regardless of complaints by banks or others.
Notice the emphasis on safekeeping.
A 100% gold backed dollar would not stop lending. It would stop fractional reserve lending, lending of money in demand accounts, and lending of money for greater terms than the bank has use of funds.
Banks could not lend money available on demand (checking accounts), but they could lend money in interest bearing accounts such as CDs, for the term of the CD.
Mike "Mish" Shedlock