Could Banks Start Charging You to Hold Your Deposits?

Last week’s release of the October Federal Open Market Committee Minutes included a brief, but important discussion that, if acted on, could significantly change the way U.S. banks operate.

The main focus of the meeting had to do with the possibility of the Federal Reserve tapering the $85 billion a month in asset purchases it has been making.

What drew the attention of U.S. bank executives, however, was talk about reducing the interest rate the Federal Reserve pays for overnight deposits.

According to The Financial Times representatives of two of America’s top five banks said that if such a reduction were to take place, banks might actually start charging customers to hold their money.

Pointing out that interest rates for depositors are already “near zero,” FT said, “Paying just to leave money in the bank would be highly unusual and unwelcome for companies and households.”

Russian English-language news channel RT, noting that financial institutions keep trillions of dollars parked overnight with the Fed as a risk-free revenue generator, said large US banks like Bank of America BAC, JPMorgan Chase JPM, and Wells Fargo WFC would have little incentive to hold these deposits in the first place if the Fed cuts the interest rate it pays.

Related: JPMorgan in Legal Trouble Over Bernie Madoff

Cutting interest rates on bank reserves was part of a discussion about finding ways to add stimulus should the Fed decide to taper. There had been speculation that tapering could start as early as next month.

One bank executive, in revealing that U.S. banks have to pay deposit insurance premiums on the money they park, told The Financial Times, “Right now you can at least break even from a revenue perspective.” A cut in interest rates, the executive said, “would turn it into negative revenue.”

The danger of negative revenue has deterred the Fed from cutting interest on bank reserves in the past. If it were to do so now, one possible solution would be to expand the new Fixed-Rate, Full-Allotment Overnight Reverse Repo Facility, FT said. This would allow banks and money market funds to accrue a small – but positive interest rate.

The net result would be that banks would have no need to charge consumers and businesses for keeping their deposits.

At the time of this writing, Jim Probasco had no position in any mentioned securities.

Posted In: NewsWall Street JournalEventsMediaGeneralBank of AmericaFedFederal Open Market Committee MinutesFederal ReserveFixed-Rate Full-Allotment Overnight Reverse Repo FacilityJPMorgan ChaseTaperingWells Fargo
We simplify the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!

Loading...