Banks Warn Fed They May Have To Start Charging Depositors

Tyler Durden's picture

The Fed's Catch 22 just got catchier. While most attention in the recently released FOMC minutes fell on the return of the taper as a possibility even as soon as December (making the November payrolls report the most important ever, ever, until the next one at least), a less discussed issue was the Fed's comment that it would consider lowering the Interest on Excess Reserves to zero as a means to offset the implied tightening that would result from the reduction in the monthly flow once QE entered its terminal phase (for however briefly before the plunge in the S&P led to the Untaper). After all, the Fed's policy book goes, if IOER is raised to tighten conditions, easing it to zero, or negative, should offset "tightening financial conditions", right? Wrong. As the FT reports leading US banks have warned the Fed that should it lower IOER, they would be forced to start charging depositors.

In other words, just like Europe is already toying with the idea of NIRP (and has been for over a year, if still mostly in the rheotrical and market rumor phase), so the Fed's IOER cut would also result in a negative rate on deposits which the FT tongue-in-cheekly summarizes "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."

If cutting IOER was as much of an easing move as the Fed believes, banks should be delighted - after all, according to the Fed's guidelines it would mean that the return on their investments (recall that all US banks slowly but surely became glorified, TBTF prop trading hedge funds since Glass Steagall was repealed, and why the Volcker Rule implementation is virtually guaranteed to never happen) would increase. And yet, they are not:

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.”

All of the above is BS: lending has never been a concern for the Fed because if it was, then one could scrap QE right now as an absolute faiure. Recall that as we showed recently, the total amount of loans and leases in commercial US banks has been unchanged since Lehman, with the only rise in deposits coming thanks to the fungible liquidity injected by the Fed.

Furthermore, contrary to what the hypocrite banker said that "the danger is that banks are pushed into riskier assets to find yield”, banks are already in the riskiest assets: just look at what JPM was doing with its hundreds of billions in excess deposits, which originated as Fed reserves on its books - we explained the process of how the Fed's reserves are used to push the market higher most recently in "What Shadow Banking Can Tell Us About The Fed's "Exit-Path" Dead End."

What the real danger is, is that once the Fed lowers IOER and there is a massive outflow of deposits, that banks which have used the excess deposits as initial margin and collateral on marginable securities to chase risk to record highs (as JPM's CIO explicitly and undisputedly did) that there would be an avalanche of selling once the negative rate deposit outflow tsunami hit.

Needless to say, the only offset would be if the proceeds from the deposits outflows were used to invest in stocks instead of staying inert in some mattress or, worse (if only from the Fed's point of view) purchase inert assets like gold or Bitcoin.

Which brings us back to the first sentence and the Fed's now massive Catch 22: on one hand, shoud the Fed taper, rates will surge and stocks will once again plunge, as they did, in early summer, just to teach the evil, non-appeasing Fed a lesson.

On the other hand, should the Fed cut IOER as a standalone move or concurrently to offset the tapering pain, banks will crush depositors by cutting rates, depositors will pull their money from banks en masse, and banks will have no choice but to close on a record levered $2.2 trillion in margined risk position.

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Millivanilli's picture

4 trillion dollars of interest has been stolen from savers by greenspit and shalom's low/zero interest rate policy.   


The citizenry  remains sedate...   Why not see if they can take it all?

SWRichmond's picture

I am the guy who said, years ago and right here on ZH, that "if the Fed really wanted inflation all they have to do is poison the well: start CHARGING interest on excess reserves.  That would have the banks hiring loan officers to stand on street corners giving out loans."

And here we are (almost).

Boris Alatovkrap's picture

Must first find street corner where not is territory of local crack whore.

ZerOhead's picture

Must first pay police officer for street corner where is not territory of local crack whore...

knukles's picture

This just in!

Today Knukles dropped a loaf in the foyer of his local bank branch.  The resultant cluster-fuck has led Jamie Dimon to publicly state that banks will now need to charge interest on client deposits in order to compensate for the additional janitorial and sanitation services necessary for the public's own good.

Thanks, Knukie.

Race Car Driver's picture

At this point in the game, I don't think there's much to talk about except how to get out of the game.

It's gonna collapse anyhow and fall all over your shoes, so you might as well start steppin'. The more folks that just walk away from this nonsense, the quicker it falls.

fonestar's picture

I think it's great that the banks will charge more.  Keep charging them and charging them more.  I can only assume that the depositors enjoy the abuse.  As long as BDSM is between consenting adults it's not my business.

Have fun pretending like your "dollar" scheme still has relevance as Bitcoin soars into the stratosphere.  People like Simon Black, Jeff Berwick and myself will be having a great laugh at your expense.

WOAR's picture

Those Bitcoin ATM's you're so fond of are going to charge you 30% to change it into useable fiat, if this happens. You do realize who is receiving Bitcoin in exchange for dollars at those ATM's, right? Hopefully you know who runs most ATM machines...banks, in case you didn't.

I hope you're long lube and hemorrhoid cream as well as Bitcoin.

fonestar's picture

Right, because nobody else will enter the business and compete for rates hey?

Moar FUD!!!!

WOAR's picture

No, they won't, for the same reason that Diebold machines are the only voting machines you've heard of.

fonestar's picture

Oh really?  I am sure.  Man, you guys really have to grasp at straws hey?  Of course if you spent five minutes thinking about the logic of your own supposed "arguments" against Bitcoin you would see just how dumb they sound.

Bitcoin will most likely make ATMs go the way of the telegraph office.

boogerbently's picture

""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."


It would be safer in your dresser, anyway.

HulkHogan's picture

But company accounts get a higher interest rate from banks anyway, assuming they have a large enough amount in the account. This would just lower that interest rate a little, or not at all, depending on how set up the "rules." They will only charge smaller accounts, i.e. the peasants, to hold cash in the bank. Same as always.

PT's picture

For the last 20 years or so my bank fees have exceeded the interest paid on my deposits.  The rot set in when all employers started using direct deposit.  For a significant part of the population, it is just too hard to get paid in cash.  I wonder what it will take for the mobs to decide they don't want to put their cash where it can be stolen by a complete stranger who lives thousands of miles away.  What will it take for them to realize that the guy who is "looking after their wallet for them" hasn't got their best interests at heart after all.

PT's picture

Actually, a significant portion of the population won't care.  These are the people who are already up to their eyeballs in debt, who just keep borrowing more money to make up any short falls.  Those people won't care until the banks decide to take ownership.

GetZeeGold's picture



Just call it a bail-in and it won't feel like it's really costing them anything.

NidStyles's picture

Sort of funny how people that are involved with BC are not talking about what they just bought with their bitcoins, but are constantly trying to tell everyone it's a currency and shame us by telling everyone how much we are losing out on.

That is what you call a fanatic.


Usually behind every fanatic is a scam.

fonestar's picture

Well I have been a fanatical supporter of total unbridled freedom since presencing myself in this world.  Profit is not what is important here.  Profit and economic power translate to political power. 

Randoom Thought's picture

I am just curious WHO you think created Bitcoin. You may say you don't care because a global fully electronic fiat currency created and controlled by someone you don't know is freedom. Freedom from whom? Freedom from the banks? Most likely not.

fonestar's picture

Who created Bitcoin is about as important as who created the first copper disk to use as money.  But obviously he/she/they wanted to keep it about the creation and not about them personally so kudos to them.

Wen_Dat's picture

Hi Fonestar,


Why is there a $100 difference between the BTC price on Gox ($820) and BTC-E ($722)?


Edit: Looking for an xchange where I can buy multiple digcurr. Gox charges 0.6% while BTC-E only .2% (and you can trade several curr).


fonestar's picture

The best answer I can give you is that currently BTC exchanges are a bit of a bad joke right now (pun intended).  Everyone is off doing their own thing.  Obviously the demand is there, but the framework is currently not in place to facilitate it yet.

papaclop's picture

Hey fonestar, I'm a big fan of Berwick and Simon Black, and might even hedge my mining stocks with a BTC someday; but you still sound like a mo.r.on.

babkjl's picture

I bought a Ballistic Drop Calculating rife scope with a built in laser rangefinder, a tee shirt and some premium tea nearly direct from the growers using Bitcoins. We're planning to buy Christmas presents this year with Bitcoins. What have you bought with your gold or silver coins recently? I bought a truck (indirectly) with mine 4 years ago. Both Bitcoins and gold have purchasing power and shouldn't only be hoarded, they have to circulate too. At least Fonestar defends with logic and some decent arguments.

TWSceptic's picture

BC = mania


It's funny to us who are not falling for it.

Seer's picture

Yeah, let's see you move in on say the territory of the poppy growers in Afghanistan.

The existing infrastructure will do whatever it takes to remain in power, and if it should find that it has to make a significant shift then it will do so, and in the process uproot any "well-meaning" folks.  Of course, if the entire reason one is pushing a given "investment" is in order to sell it off then I suppose you're on the right track (looking to get bought out) with Bitcoin...

Never One Roach's picture

my banker told me the FREE money he gets from the Fed is not enoughg for his Brand New BMW, refurbuishing his Yacht, redecorations to his Cape Code weekend mansion and his wife's fine tastes so he says he needs a Bail-In from depositors to help him out.

Sounds reasonable, yes?

ZerOhead's picture

I can only hope that the Chiro Kid wasn't abusing his stool softeners again...

James_Cole's picture

BIT OT I wonder how necessary traditional banks still are, it's conceivable within a decade they could easily be reduced to a quarter or less of their current services.

It's so easy for people to manage their own money and products like square and innovations like btc... what do banks offer in the future? Especially if they plan on going down a road of charging depositors.

stacking12321's picture

banks are useful as a place to get cash, and cash checks.

i find vendors tend to give me better pricing when i pay them in cash, with no electronic or paper trail.

aside from being a cash warehouse, they aren't terribly useful, though.



James_Cole's picture

Would be tough to justify their valuations being only 'cash warehouses' lol

The big horror is banks being rolled back to what they were in the 50s.

aVileRat's picture

When ECB tested the waters last week on what negative deposits would look like the response was full-on negative. If the world is looking for the flashpoint that will cause global revolt, then all we need to look for is what happened the last time negative rates were employed in a streched social fabric: Argentina 1986. Two years later after a full-out social strike the country declared force majuer on their loans and set off the giant ball to conduit collapse. 

If you think Joe the Plumber is upset at being laid off or having 2 jobs + his trade practice now, try explaining to him that 1% of his savings will be confiscated each month going forward. Because Obama.

Pushing on the string will not innovate banks to lend, because loan origination is done as a function of top-down macro outlook. If the macro-outlook is decidedly bad, no amount of interest rate trickery will convince them to increase rubber loans if the outlook will only further deteriorate. None of this is new, Sigmund Warburg's biography had tons of notes on what personally a negative interest rate scenario looks like at a Loan Review Officer level.

Cliff notes on SGW's highlights: "Your fucking retarded if you think lending money to someone who is not even making the inflation adjusted IRR is a good idea. Stop being stupid and get us the fuck out of this shit-hole called Germany where our 50 year customers can't even pay their workforce without using REPO conduits for daily cash float".


Bobbyrib's picture

I don't think it will be a global revolt, I think it would be a lovely complete financial collapse of the entire world leaving central banks to wonder WTF happened. 

Al Gorerhythm's picture

I'm bailing out before they bail me in. If I'm lending them my money when I thought I was making a deposit as a saving, then this proposed fee is in effect a management fee for the risk they are providing. Fucked up world, eh?

Georgiabelle's picture

I opened an account at the local credit union Friday. I no longer trust the big banks with my savings and feel that putting some of it in a credit union will give me at least one degree of separation from the nexus of evil and perhaps even buy me a bit of extra time if/when the SHTF. I know, naive. But it makes me feel more in control..

Double.Eagle.Gold's picture

I used to find vendors willing to give better prices...


Today when I ask about this I get blank stares; pay with cash, "please don't because if I receive cash I have to make a bank deposit after work" is the response I received when asking for a cash discount from a Sales Person at local Sleep Country store in Seattle Area.


Buckaroo Banzai's picture

Doesn't work at chain stores, only small businesses.

Overfed's picture

In my business, I will negotiate price with a customer willing to pay cash (or gold, silver, and ammo for that matter). If they are using plastic, the price is set in stone.

Never One Roach's picture

I went with a neighbor to look at Fridges today and the sales clerks all push the 'zero interest finance' scheme. When my friend said what discount would she get if she paid $1499 cash for the fridge they had to call a supervisor to find out what to do.



Disenchanted's picture

More than likely it was, "No can do..."

Jafo's picture

TPTB think that this will be a good idea because they think that depositos will withdraw their money and spend it rather than save it - thus stimulating the economy.  More likely this will wind up as the mother of all stock market blow offs as savers will prefer to buy shares in dividend paying companies in an attempt to preserve the value of their savings.

It will all end in tears of course but not before we see a spectacle that makes the bubble look like a flat line.  As they say - this ought to be interesting.

disabledvet's picture

this i agree with. "banks"..."the Government"...all of them appear to be watching in strange fascination as the market does nothing but go up and up and up. "Winning!" appears to be the operative term for this effect as well..and i did take note there were no names to go with those quotes. In other words those "accounts" you might start charging interest on could be what causes foreign depositors to withdraw their monies en banc from the financial establishment. Is now the time to be making this kind of threat? Seems a little odd when "the elite" has never had it so good. I mean "a 40% decline in equity prices from here is what we want"? That doesn't sound like a bank talking to me...

Renfield's picture

DVet, I always read your comments even if half the time I can't understand WTF you're saying, as you have an interesting perspective. You raise a point that was kind of worrying me too.

I also can't see why the banks would push for this - NOW - when things are apparently going so well for them. Bail-in legislation is in place. The sheeple are quiet. 'Christmas' is coming.

I guess in light of your comment I'm now wondering one of two questions:

1) Why now? OR

2) Who is it, REALLY, behind this? (If it's really the big banks pushing for it, then see 1) above.)

Cui bono?

Oleander's picture

Cash a check only if you have an acct. My sister wrote me a check and her bank, Citizens (RBS), wanted $7.00 to cash it.

No way I was giving them $7.oo. Bastards!

Seer's picture

Life is just wierd...  WAAY back when I worked for a software startup that was essentially doing electronic minting and clearing.  Late one night several folks (developers) were hanging around (taking a break from working mega hours) talking about the future of the software, we all realized that the software was a threat to traditional banks: the irony was that a big international bank was bankrolling us- I suspect that they were really only trying to keep us locked down.

Now that banks are catering to less and less people their days are numbered (it's that economies of scale in reverse thing/reason again).  It's possible that they'll go to something that's specifically targeted to business/elites, futher stratifying the upper-crust from the lower-crust: they'll likely utilize their own Internet as well.  The race is on to build combat/crontrol robots to keep all the "un-clean" away from their infrastructure: this has been happening for quite some time, in other countries.

PT's picture

J_C :  Very hard for me to get a job where I am paid in cash.  Everyone does direct deposit these days.  Same for most people.  I've even met a businessman who prefers to be paid via internet banking to cash.  That is what you're up against.

James_Cole's picture

Yeah but that service is low margin, widespread (in terms of the tech) and (as seer points out above) relies on scale. Could easily be changed overnight, i.e. switch from a TBTJ and into a local bank / credit union.

Don't get how these dinos justify their existence, particularly looking into the future. And then the idea of charging depositors? That's not a ten year business plan, that's desperation.

cornflakesdisease's picture

How dear you talk about Nancy Pelosi that way!