If the Federal Reserve has its way, Americans might soon have
to pay for keeping their cash with banks. With the overall
economic recovery remaining sluggish and high unemployment rate,
the Fed is mulling over a policy shift that might spur growth.
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The policy change, if implemented, could lead banks to charge
fees from their clients for deposits.
With the Fed contemplating tapering its monthly $85 billion
bond-buying program, the major U.S. banks including
JPMorgan Chase & Co.
Bank of America Corporation
Wells Fargo & Company
) believe that the regulator will have to find other avenues to
stimulate economic growth. This might include further lowering of
interest rates for banks for keeping money with the Fed.
At present, the benchmark interest rate for the banks for keeping
the excess money overnight with the Fed is 0.25%. Reportedly, the
banking regulator is thinking of lowering this rate to 0.00%.
Currently, banks hold nearly $2.4 trillion of excess reserves
with the Fed for earning a substantial risk-free return.
Currently, banks are breaking even for keeping deposits as they
are required to pay a small premium to a government insurance
program. If the Fed lowers the rate to 0.00%, then banks will
have to pass on this extra charge to the clients, who keep
deposits with them.
Moreover, this will discourage banks from keeping additional
reserves with the Fed, which is what the regulator wants. It
anticipates such a move will encourage banks to purchase
securities from the market or provide more loans.
Additionally, investment managers will have to find other ways to
utilize this money and earn revenues. One way is to invest in
high yield risky assets. However, this might again lead to a
whole lot of trouble for the overall economy.
Amid the speculations, the major concern is how clients would
react to such a policy change. If there is a mass withdrawal of
deposits, the primary purpose of the Fed to go ahead with the
policy shift would fail. Further, this will lead to the collapse
of the banking system as a whole.
In order to prevent such a scenario, the Fed is walking a
tightrope. The regulator might set up a separate facility where
banks can deposit a portion of the cash to generate a small but
positive return. This way it will perhaps serve both the
Whether the Fed finally goes ahead with the tapering and
implements a 0.00% interest rate on deposits remains to be seen.
The reaction of the backs and their customers is a significant
factor as the customers would not want to pay for keeping their
hard earned money with banks.