Bankers’ Hours column: Negative rates may be coming to U.S. banking
We’ve joked about banks requiring depositors to pay the bank to keep their money, so when I read about Japan’s central bank (similar to our Federal Reserve) going to “negative rates,” I scrambled to find out what that meant.
Will free checking accounts become a historical oddity? Will we have to pay the bank interest on our certificate of deposit?
No, that’s not what it means.
Here’s what it does mean: sovereign central banks function as parking lots for their member banks’ money. Interest is traditionally paid on these deposits, although the rate is always much lower than the bank could get with practically any other investment. Negative interest occurs when the central bank stops paying interest, and actually charges a fee for keeping the money.
The idea is to get the cash out of the parking lot and into circulation, through loans or even in other investments, such as securities and government debt, thus stimulating the economy. Japan isn’t the only country to do this: the central banks of Sweden, Denmark and Switzerland have done the same.
It does sound like a good idea, but wait: There’s an element of LUC here, the good old Law of Unintended Consequences.
Cut to the United States. The Federal Reserve requires big banks to periodically conduct a “Stress Test,” meaning that various models of possible economic and monetary scenarios are constructed to determine how the bank might survive the events. The Fed has directed member banks to include a negative rate contingency in the next Stress Test.
Now, the Fed has said that no, no way, absolutely not, are we contemplating instituting the policy. But, just in case it should come about …
Note that Federal Reserve Vice Chairman Stanley Fisher was recently quoted as saying, “Euro banks have been more successful with this than anticipated.” Oh-oh.
If it does happen in the U.S., what might it mean for bank customers, which are most of us? Well, it might work perfectly and we’ll notice nothing, except maybe a stronger economy. But what if retail banks don’t find investments they like? Certainly, we know that lending is more difficult because of stricter regulation on the heels of the Recession. We also know that banks, like any other business, pass increased costs along to customers.
So, it’s not impossible that we could see higher rates on loans, and lower rates on deposits for customers.
Bank CEOs aren’t going to be standing at the first tee at Augusta National Golf Club and decide to charge depositors more money for keeping their money safe. That’s not the way it works. But CFOs will crunch numbers and maybe find that if the bank has to pay to park its money, then you should pay more to park yours.
Some of us remember when financial institutions gave away premiums for new deposits, often small appliances like toasters. Will we someday have to lug a $40 microwave into our bank so it will let us open a new account?
Don’t laugh. Crazier things have happened in the last 10 years.
Pat Dalrymple is a western Colorado native and has spent almost 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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