NIRP Officially Arrives In The US As JPM Starts Charging Fees On Deposits

Tyler Durden's picture

Technically, NIRP arrived in the US back in December when as the WSJ reported at the time, America's largest banks at that time urged "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 included J.P. Morgan Chase & Co., Citigroup Inc., HSBC Holdings PLC, Deutsche Bank AG and Bank of America. However, at the time, the NIRP threat was rather nebulous, with the banks telling 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 at some point eventually. Nothing was imminent.

That changed overnight, when as the WSJ once again reported, the nebulous became tangible after J.P. Morgan Chase, the largest US bank by assets (and second largest in the US by total derivative notional) is preparing to charge large institutional customers for some deposits. WSJ adds that JPM "is aiming to reduce the affected deposits by billions of dollars, with a focus on bringing the number down this year.

The details on this latest dramatic, and until central-planning arrived, unthinkable, monetary experiment:

The move is the latest in a series of steps large global banks have been discussing in recent months to discourage certain deposits due to new regulations and low interest rates.

 

J.P. Morgan’s steps are among the most detailed and widespread. Specifics are likely to be unveiled Tuesday by J.P. Morgan executives at the bank’s annual strategy outlook with investors, these people said. Among other points, the bank is expected to stress alternatives customers affected by the deposit moves can use for their excess cash.

 

The plan won’t affect the bank’s retail customers, but some corporate clients and especially an array of financial firms, including hedge funds, private-equity firms and foreign banks, will feel the impact, according to the memo. J.P. Morgan is making the moves because certain deposits are less profitable to handle than they used to be. New federal rules essentially penalize banks for holding deposits viewed as prone to fleeing during a crisis or a stressed environment.

 

“We are adapting to a changing regulatory environment across our company,” according to the J.P. Morgan memo sent Monday and signed by the bank’s asset-management, commercial-bank and corporate and investment-bank heads.

 

...

 

J.P. Morgan is one of the most affected by new capital and liquidity rules, in part because it is one of the largest banks and has a variety of complex businesses, including trading and serving hedge funds. The memo notes that the changes are necessary to deal with clients deemed more interconnected and risky by regulators. In addition to J.P. Morgan’s relationships with hedge funds, foreign banks and private-equity firms, its dealings with central-bank clients could be also affected.

 

Under the bank’s new push, those clients will be asked to adjust certain deposits viewed as more temporary by either paying a new fee or moving the proceeds to a similar J.P. Morgan product such as a money-fund sweep account. In some cases, the bank will likely ask clients to hold these so-called nonoperational deposits at a different firm.

The WSJ punchline: "The moves have thrown into question a cornerstone of banking, in which deposits have been seen as one of the industry’s most attractive forms of funding."

And therein lies the rub, because as the Fed is preparing to raise short-term rates, which most directly affect the cost of deposits to banks (we hardly need to remind readers that the "interest rate" on the general unsecured claim that is a deposit has been ~0.00% for the past 6 years), banks are telegraphing that they have more than enough funding on the liability side of the balance sheet, and that they are comfortable enough with procuring other sources of funding that are not deposits - whose cost of capital may rise if indeed Yellen hikes rates in June - that the entire Fed rate hike process will be moot.

Of course, none of this is new to readers. Recall from April of 2013 our "One-Chart Summary Of All That Is Wrong With The US Financial System: JPM Deposits Over Loans" in which we showed that JPM, together with the other Big 4 deposit-taking TBTF megabanks have about $3 trillion in deposits over loans: the same amount as the liquidity injected by the Fed over the same time period.

 

Last November, the WSJ observed as much when it noticed the relentless increase in bank deposits unaccompanied by a matched increase in loans:

 

So now that the Fed may be finally pushing back on the commercial banks, and telling them that the cost of deposit funding is about to go up, banks themselves are pushing back on the Fed, and signalling that thanks to the trillions in fungible QE liquidity, they don't care if the Fed hikes rates, as they are now proactively seeking to purge deposits from their balance sheets.

Paradoxically, in the New Normal, even the veiled threat that one item of a bank's capitalization may have a non-zero cost of capital, is enough for the bank to do everything in its power to eliminate said cost of funding - i.e., deposits - and replace it with other sources of cheaper funds, mostly emerging from the vastly unregulated shadow banking system.

In any event, NIRP is now officially in the US, which means that one after another US commercial banks will join what has already become a NIRP free-for-all across most of continental Europe where NIRP now reigns supreme, and where trillions in government bonds yield negative rates.

Why all of the above is most amusing is that it was in August of 2012 when none other than staffer of the New York Federal Reserve warned that "If Interest Rates Go Negative . . . Be Careful What You Wish For."

These were some of the highlights of the perverted, broken monetary system that NIRP would unleash in the US as per the Fed's warning from less than 3 years ago:

  • if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.
  • I might even go to my bank and withdraw funds in the form of a certified check made payable to myself, and then put that check in a drawer.
  • If bank liabilities shifted from deposits to certified checks to a significant degree, banks might be less willing to extend loans, because certified checks are likely to be less stable than deposits as a source of funding.
  • As interest rates go more negative, market participants will have increasing incentives to make payments quickly and to receive payments in forms that can be collected slowly
  • if interest rates go negative, the incentives reverse: people receiving payments will prefer checks (which can be held back from collection) to electronic transfers

And the punchline:

  • we may see an epochal outburst of socially unproductive—even if individually beneficial—financial innovation

In short, things in the already insane monetary realm are about to get a whole lot insane-er. But don't worry, the central banks are in full control.