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On Thursday, The Bank of New York Mellon Corporation (BK - Analyst Report) announced to charge fee on cash deposits of institutional investors following the surge in deposit balance with the banks. Investors having accounts with average deposit of over $50 million in the bank would come under the purview of charges.

BNY Mellon will be charging a 13 basis points annual fee on excess deposits and an extra fee if short-term Treasury bills give negative yields. Yesterday, yields on one-month Treasury bills plummeted as low as -0.0102, the lowest level since January 2010, due to financial markets turmoil across the world.

In general terms, customers are being paid interest on their deposits by the banks and the banks pay FDIC insurance premiums for holding deposits. With the rising balance in deposits, insurance premium payments for banks are expected to rise.

Therefore, with short-term interest rates going near zero, and escalating FDIC insurance premiums on deposits, the banks will be affected if they hold large amounts of cash on their balance sheets. Therefore, BNY Mellon has come up with charging fees on deposits.

Due to the volatile nature of stock and bond markets, investors are seeking safe investments through bank deposits. Moreover, the delay in reaching a conclusion due to an increase in the country’s debt ceiling between U.S. Congress and White House added fuel to the fire. Therefore, investors moved to the banks for deposits, which increased balance in banks significantly` during the last month.

BNY Mellon totaled $26.3 trillion of assets under custody and administration as of June 30, 2011, up 3% sequentially and 21% year over year. Increasing deposits in BNY Mellon indicates that the companies are maintaining higher cash balances following the recent financial and economic imbalance and further, investment managers are selling off risky assets and putting proceeds into bank accounts to meet investor demands during redemption.

Among other banks, the largest U.S. bank, Bank of America Corporation (BAC - Analyst Report) also recorded surge in deposits with $1.04 trillion at the end of the second quarter of 2011, up 18% from the prior quarter and 64% from the prior-year year. Moreover, among BNY Mellon's competitors, State Street Corp. (STT - Analyst Report) and Northern Trust Corporation (NTRS - Analyst Report) has yet not come up with the same fee charges.

BNY Mellon intimated clients that the fees imposed on excess deposits were to preserve the excellence and strength of its balance sheet and large institutional clients having extraordinary levels of cash would be affected. Further, the bank stated the obligatory fees charge plan will be withdrawn once markets gains stability, which would tend down the deposits.

BNY Mellon currently retains its Zacks #4 Rank, which translates to a short-term Sell rating. However, in the absence of any significant positive or negative catalyst, we maintain a long-term Neutral recommendation on the stock.

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