Financial Times: Fed Move Could Force Banks to Charge Consumers for Deposits

Tuesday, 26 Nov 2013 11:59 AM

By John Morgan

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Top U.S. banks fired a shot across the bow of the Federal Reserve – they are warning that they may start charging companies and consumers for deposits if the Fed cuts the interest it pays on bank reserves, The Financial Times reported.

Such a cut by the Fed would mean banks could actually lose money on deposits, according to executives the newspaper interviewed.

That’s because taking in deposits is not free. Banks have to pay premiums of a few basis points to a U.S. government insurance program on each deposit.

Editor’s Note:
New Video: Obama Plans to Redistribute Seniors’ Wealth

“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.”

Minutes of the central bank’s October meeting showed it was heading towards a taper of its $85 billion monthly asset purchases in the coming months, but wants to find an alternative way to add stimulus at the same time.

According to the Times, most officials at the meeting thought a cut in the 0.25 percent rate of interest on the $2.4 trillion in reserves the banks hold at the Fed was an option worth considering.

But bankers the newspaper interviewed said such a cut would not really provide the right kind of stimulus or incentive for the banks.

“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.”

Alex Roever, head of U.S. interest-rate strategy at JPMorgan, said such a Fed move could also have unintended backfire consequences for money market funds.

“[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,” Roever predicted.

Examiner.com noted that because of the Fed’s accomodative fiscal policy of recent years, banks have found it more profitable to park their monies at the Fed than to lend to Main Street.

But Examiner.com said there are also other reasons why the banks may soon start removing their reserves from the Fed.

One is that new Basel III global capital provisions effective January 1 will force banks to hold much higher reserves onsite. The second reason is that a new Dodd-Frank provision taking effect then will allow banks to count customer deposits monies toward the cost of recapitalizing themselves.

Editor’s Note:
New Video: Obama Plans to Redistribute Seniors’ Wealth

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