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Some Banks Threatening to Charge for Deposits if Fed Cuts Reserve Rate

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The Federal Reserve is considering ways to cut back on their buying mortgage-backed securities and long term U.S. bonds without sending interest rates higher and hurting the economy.  As a result, U.S. banks are warning they will start charging depositors if the Federal Reserve cuts the interest rate they give banks.

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One idea floated this past week was to cut the 0.25 percent rate that the Federal Reserve pays member banks to zero percent for keeping reserves at the Fed. The hope is that if banks are not earning any interest for keeping their reserves with the Fed, they will be more willing to make loans, which would then offset the liquidity the Fed will be taking out of the markets when they taper their purchases.

Current deposit rates on all interest bearing accounts are at record lows, so many banks don't have wiggle room to lower the rates they are paying to depositors. The next step would be a negative interest rate or monthly fees on accounts. In the FDIC's Weekly National Rates and Rate Cap Survey, national average rates on variable rate accounts are all under 0.25 percent.

The national average savings rate this week is at 0.06 percent. The national average money market rate is slightly higher at 0.09 percent. Interest checking account rates at banks are paying an average rate of 0.04 percent. Short term CD rates are all under 0.25 percent as well.

1 month CD rates are averaging 0.06 percent, 3 month CD rates are averaging 0.08 percent, average 6 month CD rates are at 0.12 percent and average 12 month CD rates are at 0.20 percent. All these rates are lower than the rate is paying banks for depositing their reserves.

When the Fed mentioned this idea last week, The Financial Times reported that several bankers whom it didn't identify, said they will start charging depositors for keep money on deposits. Having deposits on hand actually costs banks some money in overhead, including administrative costs and FDIC insurance costs.

Even though the bank's threat of charging depositors is probably just a threat, a lower rate they receive on reserves will force them to lower their already low deposit rates. This could have a negative impact on the economy, which is the exact same thing the Fed is trying to avoid when pulling back on stimulus measures.
Author: Brian McKay
November 29th, 2013