NIRP Arrives In The US: TBTF Banks Tell Customers To Move Their Cash Or Be Charged Fees

Tyler Durden's picture

Back in June, the world was speechless when Goldman's head of the ECB, Mario Draghi, stunned the world when he took Bernanke's ZIRP and raised him one better by announcing the ECB would send deposit rates into negative territory, in the process launching the Neutron bomb known as N(egative)IRP and pushing European monetary policy into the "twilight zone", forcing savers to pay (!) for the privilege of keeping the product of their labor in the form of fiat currency instead of invested in a global ponzi scheme built on capital market so broken even the BIS can no longer contain its shocked amazement.

Well, the US economy may be "decoupling" (just as it did right before Lehman) and one pundit after another are once again (incorrectly) predicting that the Fed may raise rates, but when it comes to the true "value" of money, US banks have just shown that when it comes to spread between reality and the economic outlook, the schism has never been deeper.

Enter US NIRP.

As the WSJ reports, far from paying for the privilege of holding other people's cash (and why would they with nearly $3 trillion in positive carry excess reserves sloshing around) US banks - primarily of the TBTF variety - "are urging some of their largest customers in the U.S. to take their cash elsewhere or be slapped with fees, citing new regulations that make it onerous for them to hold certain deposits."

The banks, including J.P. Morgan Chase & Co., Citigroup Inc., HSBC Holdings PLC, Deutsche Bank AG and Bank of America Corp. , have spoken privately with clients in recent months to tell them that the new regulations are making some deposits less profitable, according to people familiar with the conversations.

 

In some cases, the banks have told clients, which range from large companies to hedge funds, insurers and smaller banks, that they will begin charging fees on accounts that have been free for big customers, the people said. Bank officials are also working with these firms to find alternatives for some of their deposits, they said.

 

The change upends one of the cornerstones of banking, in which deposits have been seen as one of the industry’s most attractive forms of funding, said more than a dozen corporate officials, consultants and bank executives interviewed by The Wall Street Journal.

One bank that is aggresively turning money away is the same bank for whom criminality is now an ordinary course of business, and has spent over $30 billion in recent years on legal charges and settlements: JPM.

J.P. Morgan told some clients of its commercial bank recently that it would begin charging monthly fees on deposit accounts from which clients can withdraw money at any time. The new charges will start Jan. 1 for U.S. accounts, according to an Oct. 21 memo reviewed by the Journal, and later for international accounts.

 

“New liquidity and capital requirements have changed the operating environment and increased the cost of doing business with financial institutions,” the memo read.

While ZH readers (and especially Cyprus residents) are quite familiar with the logic behind bank deposits, especially in a fractional-reserve banking system, some WSJ readers may not quite understand why this move is so profound:

Deposits have traditionally been a crucial growth engine for banks. Banks generally pay depositors one interest rate and then make loans with higher rates, often collecting fees in the process. But deposits also can be withdrawn at any time, potentially leaving a bank short of cash if too much money is removed at once.

 

The new rule driving the action is part of a broader effort by U.S. regulators and policy makers to make the financial system safer. But the move may inconvenience corporations that now have to pay new fees or look for alternatives to their bank.

 

Sal Sammartino, vice president of banking at Stewart Title, a unit of Stewart Information Services Corp. , a global title insurance company based in Houston, said he has had sleepless nights in recent weeks as he has negotiated with large banks to try to keep the firm’s deposits there. He declined to name the banks.

 

“Ultimately my balances aren’t as profitable for the banks, and that’s going to impact my business,” he said.

Dear Sal, if you want to complain to someone, complain to the Fed, whose trillions in bank excess reserves pumped in the system have made America's deposit base completely irrelevant on the margin, and thus give banks full liberty to do with the trillions in excess cash they have on their books as they will, even if it means chasing it out.

What is the official explanation for this dramatic monetary escalation that has so far glided under everyone's radar?

U.S. banking rules set to go into effect Jan. 1 compound the issue, especially for deposits that are viewed as less likely to stay at the bank through difficult times.

The new U.S. rules, designed to make bank balance sheets more resistant to the types of shocks that contributed to the 2008 financial crisis, will likely have little effect on retail deposits, insured up to $250,000 by federal deposit insurance. But the rules do affect larger deposits that often come from big corporations, smaller banks and big financial firms such as hedge funds. Hundreds of companies and other bank customers with deposits that exceed the insurance limits could be affected by the banks’ actions.

Overall, about $4 trillion in deposits at banks in the U.S. were uninsured, covering more than 3.5 million accounts, according to Federal Deposit Insurance Corp. data.

 


 

The rule primarily responsible involves the liquidity coverage ratio, overseen by the Federal Reserve and other banking regulators. The new measure, finalized in September, as well as some other recent global regulations, are designed to make banks safer by helping them manage sudden outflows of deposits in a crisis. The banks are required to maintain enough high-quality assets that could be converted into cash during a crisis to cover a projected flight of deposits over 30 days.

 

Because large, uninsured deposits would be expected to leave most quickly, the rule will now require that banks maintain reserves that they cannot use for profitable activities like making loans. That makes it much less efficient or profitable for banks to hold these deposits.

 

The new rules treat various types of deposits differently, based on how fast they are likely to be withdrawn. Insured deposits from retail customers are regarded as more safe and require that banks hold reserves equal to as little as 3% of the sums.

It's not just the (very rich) moms and pops that will be affected by this move: so are large institutions for whom cash on the sidelines is a key aspect of doing business:

The change affects some hedge-fund customers, rather than corporate accounts. The charges include items such as a $500 monthly account maintenance fee for demand deposits and a $25 charge per paper statement.

 

Larger clients with broad, long-term relationships with their banks may get a break on the new fees, according to people familiar with the situation. Banks also are likely to differentiate between clients’ operational deposits, used for things like payroll, and excess cash that can be pulled more easily, the people said.

 

At a National Association of Corporate Treasurers conference in October, consultant Treasury Strategies noted that the new rules “will redefine the economics and dynamics of corporate banking relationships.”

And while we have discussed the implications of NIRP previously, here are two key unintended consequences: first, "safe" assets such as Treasurys will get even more expensive, as banks rush into the safety of "high quality collateral" (a topic beaten to death last summer):

Some argue that while it is a good policy on its face, the rule potentially magnifies problems in a recession by encouraging banks to hoard high-quality assets, potentially paralyzing markets for these assets such as Treasury securities and some corporate bonds.

 

This proposal, which is supposed to promote financial stability, actually does the opposite,” said Thomas Quaadman, a vice president at the U.S. Chamber of Commerce.

The second unintended, or perhaps perfectly intended, consequence is that just like with money market fund reform, the underlying driver behind NIRP and all other forced capital reallocations, is to push "money on the sidelines" away from an inert mode, and into equities (as idiotic as that sounds, since every purchase of a stock means someone cash out on the other side), in the process lifting the aggregate value of equities and pushing the world's biggest stock (and bond) bubble to unprecedented heights.

Practically speaking, it means that before all is said and done, banks will be charging usurious rates of interest on even the smallest bank deposits, in a push to get every last "saver" to reallocate their wealth away from pieces of fiat paper into pieces of paper promises (held by the DTCC no less) to be paid by increasingly more cash-flow deficient companies.

And while it assures that the next market crash will be absolutely epic with everyone having gone all-in and nobody left with any dry powder, shorts to sover or "cash on the sidelines", it also means that the S&P still has a ways to go: perhaps as high as Jeremy Grantham's peak bubble level of around 2250 or higher, befire as Grantham himself predicted, the central-planners finally lose control and it all comes crashing down.