Story in the FT last night has US banks warning that they may start charging depositors, or even turn them away if the Fed cuts the interest on excessive reserves. The option to cut the IOER rate was touted as a possible option by some Fed members but the banks have hit back as they fear the squeeze on margins will make the model of taking savers on board worthless.
“Right now you can at least break even from a revenue perspective,” said one executive, ( a cut) would turn it into negative revenue – banks would be disincentivised to take deposits and potentially charge for them”.
I think the US is a long way from having to think about such measures but they also face a similar problem in that the liquidity isn’t feeding through to the economy. A lack of demand is one reason why and is pointed out by another bank;
“It’s not as if we are suddenly going to start lending to (small and medium-sized enterprises). There really isn’t the level of demand, so the danger is that banks are pushed into riskier assets to find yield.”
What is perhaps surprising is that there has been a lack of similar response from European banks to the possibility of the ECB going negative on the deposit rate. The fact they aren’t kicking up a stink could be because they’ve got more to worry about than tiny margins on their deposit business.
Full story from the FT here (gated)
