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Christopher Menkin
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Christopher "Kit" Menkin is of editor LeasingNews.org (http://www.leasingnews.org/), an internet trade publication for the finance/leasing industry. He has 41 years experience in the finance/leasing industry as well as being a founder of a commercial regional bank and serving on... More
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  • ---Will Banks Start Charging For Deposits? 7 comments
    Dec 4, 2013 2:08 PM

    Three years ago Dan Geller projected that interest rates on bank deposits could go negative and was dismissed as impossible. In December we may be closer than ever to such new reality when the Fed meets on the 17th and 18th of this month.

    SAN ANSELMO, Calif. - Exactly three years ago, in November of 2010, an analysis by Dan Geller, Ph.D. of Market Rates Insight (marketratesinsight.com) projected that negative interest rates on deposits is likely if the economic recovery continues to be sluggish. Last week, the minutes of the Fed's October meeting reflected the possibility of a cut in the 0.25 percent the Fed currently pays banks on about $2.4 trillion in reserves banks are holding at the Fed, which may force banks to start charging consumers and business for deposits.

    Bank executives at some top U.S. banks feel that a cut in the 0.25 percent on reserves they hold at the Fed will force them to start charging depositors for deposits because taking in deposits is not free even if the bank does not pay interest to consumers. Aside from the expense of paying consumers interest on deposits, banks have to pay insurance premiums to the FDIC for the for deposits insurance.

    Dan Geller, Ph.D., Exec. VP
    Market Rates Insight

    "Is it possible that we are witnessing a paradigm shift in the way consumers view deposits?," asked Dan Geller, Ph.D. Executive Vice President at Market Rates Insight. "Are consumers starting to view FDIC-insured deposits from a pure insurance perspective as opposed to seeking interest income? And if so, will consumers be willing to pay a premium for insured deposits as compared to earning interest on their deposits? These are some of the questions stemming from the new economic reality that we may be facing in the not-so-distant future.

    Would consumers be willing to pay 0.25 percent to insure their deposits? For example, would they pay an insurance premium of $250 a year (0.25 percent on a 12-month CD) to ensure their $10,000 is safe and that if the bank defaults, they will get their money back? Normally no, but again, these are not normal times. When it comes to money management, there are only two human emotions that dictate action - greed and fear. The allocation of greed and fear in the financial-decision-making process depends on perceived risk. As a general rule, this allocation follows the 80/20 rule, which means that in good economic times, the make-up of the financial decision is 80 percent greed and 20 percent fear. On the other hand, in troubled-economic times it's the reverse - 80 percent fear and 20 percent greed.

    Therefore, the financial anxiety of people, the uncertainty about the prospects of economic recovery and the soft job market make it more than likely that consumers will be open to the notion of paying a small premium to protect their principle deposits in return for the assurance that their money is safe regardless of how bad the economy gets.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Comments (7)
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  • Westcoaster
    , contributor
    Comments (580) | Send Message
     
    I'm confused won't the lowering of interest on reserves just encourage banks to lend more or take their money out of Fed funds?

     

    Banks are already free to charge for holding deposits, I just don't think the depositors would stick around?
    4 Dec 2013, 06:37 PM Reply Like
  • Christopher Menkin
    , contributor
    Comments (74) | Send Message
     
    Author’s reply » I don't think depositors will go for it either. But then, if the profit is not there, it is similar to keeping a $1,000 in the bank and no charge for the bank account. It might be raised to a higher dollar amount, as well as banks who have a lower amount, such as $100.00, may charge for the account.

     

    Banks are looking for ways to produce more profit. At one time, checks were free, accounts were free, no ATM charges, etc.
    5 Dec 2013, 11:14 AM Reply Like
  • Westcoaster
    , contributor
    Comments (580) | Send Message
     
    Yes, this could be a good deal for banks if they got rid of the CEDARs system, whereby they spread money out between banks up to 250K.

     

    I thought there would be more trouble when the FDIC removed the unlimited guarantee on non-interesting bearing accounts, but it passed without much movement at all.

     

    Businesses and folks that need or want to hold large cash reserves I think would pay for this insurance if they didn't have the CEDARs system.

     

    Can I ask you another question? When the economists talk about stopping to pay Interest on Excessive Reserves at the Fed they are really talking about not paying on Fed Funds aren't they?

     

    The actual loan reserve accounts at each bank are just a separate accounting number.

     

    My point of this question is many economists think that if the Fed stops paying on Fed Funds it makes the system less safe. IE banks will hold less reserves. I feel that this is a misunderstanding of how banks work. Am I correct with my thinking?
    5 Dec 2013, 02:28 PM Reply Like
  • Christopher Menkin
    , contributor
    Comments (74) | Send Message
     
    Author’s reply » That is not a simple question, as well as may be "academic." I will ask the write of the article for his opinion.
    6 Dec 2013, 12:02 PM Reply Like
  • dangeller
    , contributor
    Comment (1) | Send Message
     
    Banks need to maintain a minimum of about 3% in net interest margins (the difference between the average loan rate and the average deposit rate) in order to survive. Ideally, banks would like to increase the loan rates in order to increase their net interest margins, but in the current economy when lending is soft, they can’t. Thus, if banks lose the subsidy of 0.25% on reserve from the Fed, they will have to decrease expenses, which mean even lower or negative interest rates on deposits.

     

    Dan Geller, Ph.D.
    Executive Vice President
    Market Rates Insight
    6 Dec 2013, 03:16 PM Reply Like
  • Westcoaster
    , contributor
    Comments (580) | Send Message
     
    Dan, thank you for the answer and welcome to Seeking Alpha. There are many knowledgeable people on this site. I have been enjoying Christopher's fresh viewpoint on the banking system for many years now. His opinions will not be in the headlines but he is always correct.

     

    I agree the reduction of IOER will move deposit rates even lower. The Fed is looking for any and every tool to use post QE to keep rates low and they can slowly walk down this number.

     

    As you mention it would be a big change for people to have to pay for the insurance, but for some parties, it would make sense. I like the idea and I think it is bullish for banks.
    7 Dec 2013, 08:40 PM Reply Like
  • Christopher Menkin
    , contributor
    Comments (74) | Send Message
     
    Author’s reply » Thank you. What appears on this blog are select articles from http://bit.ly/1dhMMnk, a trade publication for the banking, finance, and leasing industry, which appear two to three times a week.
    9 Dec 2013, 12:01 PM Reply Like
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