Will ‘Too Big to Fail’ Banks Charge for Deposits?

$82 billion.

What does that figure represent? The subsidy (aka competitive advantage) that accrues to our major banking institutions from favorable borrowing rates given their status as ‘too big to fail.’

Those tens of billions of dollars truly represent a nice, big head start for a handful of banks, and a withering assault on the precepts of free market capitalism for the rest of us.

As if $82 billion were not enough of a subsidy, let’s not forget that these banks pay you, as a depositor, virtually zero interest for the ‘privilege’ of holding your money there. Well, that may be changing. How so? How would you like to actually pay interest to the banks in order to keep your money in their institutions? Really? No way?

Yes way.

Although you might think paying banks to hold your deposits is a scenario straight from The Twilight Zone, I would view it as more the price of protection imposed by those seen at work in the all time classic, The Godfather. Let’s navigate as the Financial Times sheds light onto a practice that smells like extortion:

Leading US banks have warned that they could start charging companies and consumers for deposits if the US Federal Reserve cuts the interest it pays on bank reserves.

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.

The warning by bank executives highlights the dangers of one strategy the Fed could use to offset an eventual “tapering” of the $85bn a month in asset purchases that have fuelled global financial markets for the last year.

So while the Federal Reserve knows that it needs to begin tapering its printing press of $85 billion a month in its quantitative easing program, it is trying to figure out a means of further supporting the economy. The Fed hopes that lowering the rate it pays banks on their reserves would motivate the banks to put that money to work in the economy and generate a degree of velocity in the money supply from the current anemic levels.

The banks’ response that they would simply pass this lowering of rates along to depositors is indicative of the fact that our major banks are nothing more than an oligopoly that possess enormous pricing power.

As if an $82 billion subsidy and an ongoing wealth transfer from savers into the banks were not enough, the prospect that depositors might actually have to pay banks to hold their funds strikes me as being all too similar to the costs borne by many a small business that buy ‘protection’ imposed upon them from those running rackets.

And all this from an industry that the American taxpayer bailed out a mere five years ago.

With friends like these, who needs enemies?

About Larry Doyle 522 Articles

Larry Doyle embarked on his Wall Street career in 1983 as a mortgage-backed securities trader for The First Boston Corporation. He was involved in the growth and development of the secondary mortgage market from its near infancy.

After close to 7 years at First Boston, Larry joined Bear Stearns in early 1990 as a mortgage trader. In 1993, Larry was named a Senior Managing Director at the firm. He left Bear to join Union Bank of Switzerland in late 1996 as Head of Mortgage Trading.

In 1998, after 15 years of trading and precipitated by Swiss Bank’s takeover of UBS, Larry moved from trading to sales as a senior salesperson at Bank of America. His move into sales led him to the role as National Sales Manager for Securitized Products at JP Morgan Chase in 2000. He was integrally involved in developing the department, hiring 40 salespeople, and generating $300 million in sales revenue. He left JP Morgan in 2006.

Throughout his career, Larry eagerly engaged clients and colleagues. He has mentored dozens of junior colleagues, recruited at a number of colleges and universities, and interviewed hundreds. He has also had extensive public speaking experience. Additionally, Larry served as Chair of the Mortgage Trading Committee for the Public Securities Association (PSA) in the mid-90s.

Larry graduated Cum Laude, Phi Beta Kappa in 1983 from the College of the Holy Cross.

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