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How bad must it be when banks don’t want your money

How bad must it be when banks don’t want your money

This is a very curious development, via The Wall Street Journal:

Bank of New York Mellon Corp. on Thursday took the extraordinary step of telling
large clients it will charge them to hold cash.

The unusual move means some U.S. depositors will have to pay to keep big chunks of money in a bank, marking a stark new phase of the long-running global financial crisis.

The shift is also emblematic of the strains plaguing the U.S. economy. Fearful corporations and investors have been socking away cash in their bank accounts rather than put it into even the safest investments….

The letter said Bank of New York finds its deposits “suddenly and substantially increasing” as investors are in a mass “de-risk” mode. The bank said the decision was driven by the fact that it cannot invest much of the new deposits because clients have the ability to move the funds out at any moment.

The ultra-low interest rates set by the Federal Reserve in an effort to stimulate the anemic recovery have also neutered banks’ ability to reap profits from investing their deposits.

What means it, says you?

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Is this an invitation to create a bank run? If you start charging people to hold their cash (which is the basic function of a bank) don’t you create incentives for them to put it somewhere else?

Is this crazy or am I missing something?

Central planning 101, ver. n.0. Interest rates are close to zero but still people and enterprises refuse to invest and spend (for damn good reasons). How can you force them to stop saving, borrow money, put their money at risk or spend it? Charge them negative interest rates.

NY Times

Republican (Codevilla might refer to it as “ruling class”) central planning. One problem among many, most stuff is made somewhere else like China. Increasing spending means more jobs in China (not here),with even more trade and account imbalances.

Cowboy Curtis | August 5, 2011 at 10:40 am

It means that at a time when the economy is horrible and giving every appearance of getting worse while a semi-closet socialist in the White House is demanding more of their money as he prepares to make class warfare the central plank of his reelection campaign, the wealthy are getting as much skin out of the game as possible. As well they should. Obama is desperate. He has nothing to campaign on in terms of positive accomplishments, so he has to run against a bogey man. Rich people don’t tend to get rich by being fools, so they are taking steps to protect themselves from a drowning politician who’ll be willing to take them down with him.
When liberals and marxists fail, someone has to be punished. Its never their failure, they never reexamine their ideology or policy because so far as they are concerned, those things can never be wrong. So its the people, or some portion of the people, that have failed the politician(s), not the other way around. Every time he gives a speech, Obama tells us who he plans to punish.

“The bank said the decision was driven by the fact that it cannot invest much of the new deposits because clients have the ability to move the funds out at any moment.”

It is puzzling, doesn’t it want to join the the big boys in the “too big to fail” club?

    VetHusbandFather in reply to Owego. | August 5, 2011 at 11:44 am

    “The bank said the decision was driven by the fact that it cannot invest much of the new deposits because clients have the ability to move the funds out at any moment.”

    It seems to me a better solution would be to continue to provide a pretty low level of interest on funds, but create an increased penalty for removing large sums from the account. At least that way there is still an incentive to put the money in the bank as well as an incentive to leave it there for a while.

      Technically, this already exists: it’s a CD. At my bank, I can get one for as low as three months. It’s got a .15%-.25% interest rate, depending on how much I put into it. But that’s better than a negative interest rate.

It means we are in a robust recovery. /lib

Keep your money in your mattress…

The banks don’t want our money. The. Banks. Don’t. Want. Our. Money. Yeah, the country is in the very best of hands….

In order for a bank to make money between the rate it can safely hold money (say 0%) and the rate it pays you, the interest rate has to be negative (whether it is a negative interest rate or just fees).

This means risk is very, very high in the broader market (flight to safety) as well as it means interest rates are artificially low from government intervention.

What I hope is that Republicans start to make an issue of this next year. Artificially low rates rob more than anyone seniors with savings, who get less return on their holds and CDs, in order to recaptialize to big to fail banks.

I think the campaign rebuttal to Mediscare goes something like this:

“[voiceover] Democrats are robbing seniors of their savings to bail out banks … [image] Democrats and the Fed breaking into and ransacking seniors homes of seniors, stealing their most valuable possessions to deliver to their Wall Street crony masters”.

Or something like that … what’s sauce for the good 🙂

Its worth keeping in mind that the Bank of NY is run by a Canadian banker in Bob Kelly. He was, at one point, president of one of Canada’s largest and most successful banks. I can see his strategy with this move. Since they can’t or don’t want to invest the money at a greater rate than they currently pay, they are actually taking steps to discourage deposits. I believe this is an intended strategy to sit on the fence for the next couple of years, hoping Obama is thrown out on his ass, after which lending will again become a reasonable risk activity. If they’re intent is to get out of the lending game until Obama is gone, why would they need deposits. This would be a very conservative approach. Canadian bankers are very conservative.

MaggotAtBroadAndWall | August 5, 2011 at 1:11 pm

It’s a rational response to irrational policy.

They have to pay FDIC insurance on deposits. Because the Federal Reserve is keeping interest rates at about 0%, they can’t lend it out at overnight rates that are sufficient to cover the FDIC insurance charge – whether they are lending it in the overnight bank funding markets or lending it to the government in the form of over-night t-bills.

So, the government mandates that they pay deposit insurance, and then they set interest rates at levels where banks can’t lend at rates sufficient to cover the insurance premium charges.

Whoever above said central planning run amok has it right.

Clearly, the following is the statement that drew the most attention of commenters here:

The bank said the decision was driven by the fact that it cannot invest much of the new deposits because clients have the ability to move the funds out at any moment.”

Of course, banks used to rely on obtaining and maintaining large numbers of depositers by adopting attractive and favorable terms, even with easy access to the cash, which meant that whether any particular depositer or his cash came or went was really immaterial . . . the banks were able to maintain an ongoing pool of cash, which they could use to make a variety of different kinds of loans, with a variety of terms for repayment (whilst also encompassing a variety of devices for ensuring their financial security), all of which would give them a positive balance sheet in the end.

But federal legislation and regulation toyed around with that arrangement over time, including by implementing requirements for institutions to undertake at least a percentage of unacceptable risks, particularly in the mortgage market. As we know, over time that contributed significantly to the undermining of the nation’s financial system and several of our larger institutions a few years ago — the housing bubble.

Some of the more troubled amongst those institutions, including ones that had to be bailed out because they are “too big to fail” are now adopting policies that can only have the long term effect of driving people away.

For example, I am aware of one very large banking institution that has recently adopted a policy of placing repeated and harassing phone calls to at least some of their mortgagors, every month, demanding that the payments be made prior to the actual payment deadline. I’m confident that the basis of that new policy was their conclusion that if they did this to huge number of their mortgagors, a significant percentage of them would fold under the pressure, and simply agree to pay before the deadline, just to make the calls stop.

Subotai Bahadur | August 5, 2011 at 2:40 pm

It is interesting both as a marker of how bad our economy is, and as to what incentives it is creating. The stock and bond markets have not been real markets for at least 3 years. Between the activities over the last 3-4 years of the Working Group on Financial Markets [created by Executive Order 12631, operating out of Maiden Lane next to Wall Street], the Federal Reserve intervening in the bond markets through QE1, QE2, and coming-soon-to-an-economy-near-you QE3, and the use of HFT computer algorithms that freeze out all but the largest and politically best connected institutional investors; it is an act of either faith or folly to invest.

This has been apparent for years as I said. I offer two additional indications. Look back the statistics on mutual fund flows. Their liquidity levels have been plummeting as all but large institutional investors pull out. Part of that is people needing the cash to live day to day, part is people not trusting the market. Try to be a trader dealing with his own account during one of the increasingly frequent “flash crashes” when the HFT algorithms get crosswise. If you are not a HFT trader, you cannot usually and reliably get in to the markets to save yourself.

Another statistic to watch is insider trades. Corporate officers ARE allowed to trade in their own stocks, just not on the basis of information the public does not have. The trades have to be reported to the SEC, and if you dig, they are available. Much of the trading is corporate officers exercising and selling the stock option portions of their compensation. Nothing wrong with that. The ratio of “insider” stock sales to stock purchases used to be less than 100 [10^2] to one before things went south a few years ago. For the last few years that ratio of sales to purchases of their own stocks has been getting worse. The last time I looked a few months ago it was in the 10 ^4 to one range. Corporate officers are reading the signs and getting out of the market in their own companies. You can find this information at “zerohedge dot com”. Note that other than being a reader, I have no connection with the site. Note further, that comments are by a strictly limited registration only, it is mostly brokers and traders, and they are a crude, foul-mouthed lot.

With no safe way to invest or park money and stay in the market other than the rigged game of T-bills, physical commodities [always risky with high and growing regime risk], and banks; cutting off banks as anything but a way to slowly have your money seized means that that the incentive to stay in US markets is being cut to a very low level. With increased taxation baked into the economy on top of that, the key concept is “capital flight”. Corporate and personal assets moved out of the country have a chance of at least a break even investment, and of being outside the reach of one form of seizure or another by the US government. There is, of course, regime risk in other countries, and that has to be allowed for.

If I ran an institution/corporation involved in international trade and finance [*], moving money around the world to run the business is part of the normal order of things required for transactions. I would be shifting my financial weight and moving and keeping assets overseas as much as possible, and really be leery about moving them back. Or I would be pulling the Rhett Butler gambit, and stockpiling physical commodities overseas, paying the storage and security costs and hoping appreciation covered them and then some. But doing business in the US has become far less attractive for those who have other options in the last few weeks.

Right now it is one large, connected bank doing this. I assume that they will lose deposits for a while to other banks who do not charge the fee. That will last until economics or political influence allows all banks to charge that fee. And once it becomes universal, it will increase rapidly due to the effective oligopoly pricing; making capital flight more attractive.

This is not going to end well.

[*- which concept is fantasy, I be po’ and unable to invest, and am not a trader, financial advisor, or broker. My conjectures are worth, at most, what you are paying for them.]

Subotai Bahadur

Alan Kellogg | August 5, 2011 at 2:56 pm

There was a time when banks charged as much as 15% to hold your money for you, sounds to me like banks are going back to those days. We’re reverting to medieval monetary policy.

The flip side is that depositors would have to be nuts to make long-term investments at rates approaching 0%.

One thing we can bet on is that interest rates can only go up.

What depositor wants a 10 year CD at 0.25% interest?

Of course, the solution to this is a government mandate that you can’t withdraw money from your accounts for 18 months after you deposit it. Expect to hear the Administration propose that any time now. After all, it is not your money and you have too much of it anyway…

Some might think it means that others are rich racist pigs waiting for the Obama Administration to exit the White House until they release their money and safely reinvested in our economy, where they hope to be free from the burden of over regulation and being taxed out of the marketplace.

And the rest of us pray that it’s true, except for the rich racist pig part, because to us it’s called ‘Capitalism’.

US MM Funds – The dumbest money of all

“The 4+% drop in stocks today was a sideshow for what is happening in the funding markets. The important news came from BNY Mellon. (Zero Hedge link for details). BONY is now charging to take deposits! We also have Tbills with negative yields. The only conclusion? Money has a negative value. If that is the case then money funds will break the buck. I think we’re pretty close to the edge with this.

If you accept the premise that Zero Return must also equal Zero Risk then what is the solution to the current crisis in the funding markets? Simple. Charge more for money. If the return is raised, the appetite for risk will rise from zero. Problem solved.

The one thing that is absolutely not going to happen is an increase in basic interest rates. For there to be a balance that attracts short term funding and stabilizes things in the capital markets I believe the Fed Funds rate would have to be about 1.5%.

Not only is that not going to happen we might even get the reverse. The Fed could easily attempt to buy some market peace by issuing a statement that the policy of zero interest rates would be extended for a minimum period of one year. I consider this to be a “high probability” to happen in the next 30 days.

My conclusion is that the Fed is going to do exactly the opposite of what is needed. Their action will precipitate a new round of instability. Funding sources that are now under stress are only short date financing. One week to one month is where the problems lie today. But the Fed’s action could very well push out the instability to impact longer maturities like 3 and 6 months. Should that happen, the lights will go off pretty quickly.

Bernanke’s no dope. He must see what is happening in front of his eyes. He must understand that ZIRP is at the heart of the problem. But he is pregnant with ZIRP and his “baby” is going to term.”

Zero Hedge, Krasting

I’ll be happy to keep their money for no charge. Call me at 1-800-646-3669.

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