United States banks have warned investors, including companies and consumers, that any additional cuts by the Federal Reserve to lower the interest rates on bank reserves may force them to charge customers for deposits.
This is terrible news for depositors who are already dealing with interest rates which have hovered near zero for months. What would become even more detrimental to investors is paying to have their money stored in banks, while the banks use their funds to conduct business.
What is fueling the banks announcement?
Banks warn charging for deposits is just one way they may have to deal with the recent announcement that the Federal Reserve may begin to “taper” off their program of quantitative easing, which they have used for years to stimulate the global economy by injecting an estimated $85 billion a month in asset purchases.
The Fed’s plan could begin as early as December of this year, although the Federal Reserve noted they are looking at a variety of strategies to add stimulus into the economy. According to most officials, they “thought a cut in the interest on bank reserves was an option worth considering.”
How soon could deposits be charged?
According to two executives at the top five United States Banks, they could face issues if the Federal Reserve cut anymore off the 0.25 per cent rate of interest on the $2.4 trillion in reserves they hold at the Federal Reserve.
Why would the banks be forced to charge for deposits? As we all know any type of bankruptcy business costs the banks money and even holding deposits in not free. For instance, they have to pay premiums of a few basis points to a US government insurance program.
But if the rates were cut there would be no way for banks to break even, and they cut would “turn it into negative revenue – banks would be disincentivised to take deposits and potentially charge for them,” according to one bank executive.
Another downside of the move could be that many banks and asset managers may be forced to generate income by investing in what could be a higher yielding but riskier asset.
The Federal Reserve is aware of the dangers of cutting the interest rate and so far this has kept them from making this move. One expert noted that if they do decide to do this 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.”
Money market funds could also be affected, according to 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.
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