In unprecedented fashion, Bank of New York Mellon (BNY) announced yesterday (8/4) that they don’t want any more money from some of their largest clients (over $50M in deposits) and they will start charging 13 basis points or .13% for holding their cash. You might be asking yourself why would a bank not want deposits and how will this announcement potentially affect the rest of us?
Why would a bank not want more deposits?
Over the past few weeks, many of the largest financial institutions in the world have been gradually reducing their risk by selling investments and holding the cash at the bank as they re-allocate their funds. The result, banks are being flooded with deposits which are considered transient and thus cannot invest that money and earn a return. More deposits also mean that banks will have to set aside more capital to meet capital reserve requirements and also must pay the FDIC a 0.10% deposit based fee. To offset the loss, banks will begin charging customers, which is exactly what has happened at Bank of New York Mellon (BNY).
Why is there so much cash being held at banks?
The 512 point drop (4.3%) in the Dow Jones Industrial Average and the 60 point drop (4.6%) in the S&P 500 yesterday was significant, but, it wasn’t sparked by any one independent event. When markets move that quickly and significantly as they did yesterday, it is likely due to a chain of events, which in this case, started with the recession in 2008. The lingering sovereign debt crisis, the debt ceiling debacle, a weak jobs market and a lack of consumer confidence are all related to why we are in this position today. Now, we are left with a lot of cash sitting on the sidelines as large financial institutions reduce their risk.
Interest Rates on Savings Accounts Should Continue to Fall
We are in the beginning of a period of financial repression in which interest rates on savings accounts are significantly lower than the rate of inflation. You will actually be losing money because the value of the dollar is going down quicker than the interest rate you earn on your cash. This trend will likely continue and the announcement such as the one made by Bank of New York Mellon (BNY) may start to impact the individual saver. Other banks may soon follow suit and savers may even begin paying a premium just to keep their money safe at the bank.
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