If the Federal Reserve has its way, Americans might soon have to pay for keeping their cash with banks. With the overall economic recovery remaining sluggish and high unemployment rate, the Fed is mulling over a policy shift that might spur growth.
The policy change, if implemented, could lead banks to charge fees from their clients for deposits.
With the Fed contemplating tapering its monthly $85 billion bond-buying program, the major U.S. banks including JPMorgan Chase & Co. (JPM - Free Report) , Bank of America Corporation (BAC - Free Report) , Citigroup Inc. (C - Free Report) and Wells Fargo & Company (WFC - Free Report) believe that the regulator will have to find other avenues to stimulate economic growth. This might include further lowering of interest rates for banks for keeping money with the Fed.
At present, the benchmark interest rate for the banks for keeping the excess money overnight with the Fed is 0.25%. Reportedly, the banking regulator is thinking of lowering this rate to 0.00%. Currently, banks hold nearly $2.4 trillion of excess reserves with the Fed for earning a substantial risk-free return.
Currently, banks are breaking even for keeping deposits as they are required to pay a small premium to a government insurance program. If the Fed lowers the rate to 0.00%, then banks will have to pass on this extra charge to the clients, who keep deposits with them.
Moreover, this will discourage banks from keeping additional reserves with the Fed, which is what the regulator wants. It anticipates such a move will encourage banks to purchase securities from the market or provide more loans.
Additionally, investment managers will have to find other ways to utilize this money and earn revenues. One way is to invest in high yield risky assets. However, this might again lead to a whole lot of trouble for the overall economy.
Amid the speculations, the major concern is how clients would react to such a policy change. If there is a mass withdrawal of deposits, the primary purpose of the Fed to go ahead with the policy shift would fail. Further, this will lead to the collapse of the banking system as a whole.
In order to prevent such a scenario, the Fed is walking a tightrope. The regulator might set up a separate facility where banks can deposit a portion of the cash to generate a small but positive return. This way it will perhaps serve both the purposes.
Whether the Fed finally goes ahead with the tapering and implements a 0.00% interest rate on deposits remains to be seen. The reaction of the backs and their customers is a significant factor as the customers would not want to pay for keeping their hard earned money with banks.