WHAT HAPPENS WHEN CONFIDENCE IN THE ECONOMY STARTS TO CAPSIZE (AGAIN!) ... ALL BETS OFF!
Bank of New York Mellon Corp. on Thursday took the extraordinary step of telling large clients it will charge them to hold cash. [OUTRAGEOUS! NO NOT REALLY.]
Its the latest sign of the worries roiling global markets. [WHO COULD HAVE GUESSED?] 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. [BEATS A MATTRESS ... OR AS THE MOB SAYS, "TO THE MATTRESS'S" AS A MOVE TO PROTECT RESOURCES FROM UNCERTAINTY.]
The giant bank will begin assessing a fee next week on customers that have been flooding the bank with dollars. The one-month Treasury bill traded at a negative yield for the first time since June — that forewarns the market that investors are so worried that they are prepared to pay the government to take their money. [LEFTY TWO-FINGERS LOCK THE DOORS AND BOLT THE WINDOWS!]
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. [HOT MONEY!, A BANKING TERM FOR MONEY SEEKING LESS RISK OR SHORT TERM RISK-FREE PARKING?]
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. [BANK'S MAKE MONEY WITH OTHER PEOPLE'S MONEY AND WHEN THERE'S NOT PLACE TO PUT "HOT MONEY" THEY PUT IT IN THE FED OR OVER-NIGHT FED FUNDS ... BUT THAT DOESN'T COME WITHOUT A COST.] The deposits are transient [HOT MONEY] and given continued economic weakness, there is not a lot it can do with them. When a large bank sneezes others get the sniffles you can be assured the tissues will be flowing.
Of course those with the "Hot Money" are not happy campers over the new fee.
Over the past two weeks, money-market funds, corporate treasurers and investment houses have pulled money out of securities that mature in more than one day in favor of stashing their cash in bank accounts at Bank of New York and other banks with custodial operations. The accounts don't earn interest, but have a big attraction: They are insured by the Federal Deposit Insurance Corp. NOW HERE'S THE RUB ... KEEP READING!
The fastest-growing asset on bank balance sheets this year is cash. Since the beginning of the year, U.S. bank holdings of cash are up 83%, or $890 billion, to $1.98 trillion. Consumer loans, by contrast, have grown 0.2%, or $1.7 billion. Commercial and industrial loans are up 3.8%, or $46.1 billion.
Bank of New York said that customers WITH more than $50 million in their accounts since the end of July will face an annual fee of at least 0.13% of the excess deposits. [THE RUB] The fee would rise if the one-month Treasury yield dips below zero, according to the letter sent to customers. [THE SALT]Bank of New York Mellon is preparing to charge some large depositors to hold their cash.
The bank had $162.5 billion in deposits as of March 31.
HOLDING CASH COMES AT A COST TO BANKS. MANY PAY FEES OF ABOUT 0.10% TO THE FDIC TO "INSURE" THEIR DEPOSITS ... SOOOO, GIVEN THE SIZE OF DEPOSITS AND FLOWS IN AND OUT OF MONEY-MARKET FUNDS THE CHARGES COULD RUN INTO THE MILLIONS OF DOLLARS ... TRANSLATION: CAPITALISM AT WORK -- LESS PROFITS. FURTHER IMPACTING THE PROBLEM IS LACK OF CONSUMER DEMAND, FRANK-DODD COMING ONLINE ... AND EXTREMELY LOW CONSUMER CONFIDENCE.
One place banks have turned to put their cash is the Federal Reserve. Since late 2008 it has been paying 0.25% interest on funds banks hold with in reserve with the Fed.
However, the Fed's options is to reduce or even eliminate that interest payment, hoping to push banks to invest their deposits in the private sector. [IN THIS ECONOMY THAT WILL BE LIKE PUSHING ON A ROPE!]
THE ALICE AND WONDERLAND OF THE GLOBAL FINANCIAL SYSTEM IS UNDER FULL ATTACK WHERE INTEREST RATES ARE NEAR ZERO ... DO YOU THROW THE BABY OUT WITH THE BATH WATER OR KEEP BAILING OUT THE TUB? MAYBE YOU LOOK FOR THE SHALLOWS AND DITCH THE TUB ON THE SAND ... INTERESTING PROBLEM.
But with the economy weakening, the Fed is considering all sorts of ways to promote spending, investment and growth. NEGATIVE INTEREST RATES (CHARGING TO HOLD CASH) SLOWS CAPITAL INFLOWS INTO BANKS AND THE FED ... BACK TO THE MATTRESSES.
