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Big banks consider charging for deposits, are probably bluffing

What if banks gave you a negative interest rate, actually charging for deposits, rather than paying interest? That’s what some banks are contemplating if the Federal Reserve stops paying them .25 percent interest on the gigantic reserves they hold at the central bank.

Late last month two unnamed bank CEOs were in the Financial Times [3] saying that losing the interest payments from the Fed would make taking deposits a losing proposition in many cases:

Executives at two of the top five US banks said a cut in the 0.25 per cent rate of interest on the $2.4 trillion in reserves they hold at the Fed would lead them to pass on the cost to depositors.

Banks say they may have to charge because taking in deposits is not free: they have to pay premiums of a few basis points to a US government insurance programme.

“Right now you can at least break even from a revenue perspective,” said one executive, adding that a rate cut by the Fed “would turn it into negative revenue — banks would be disincentivised to take deposits and potentially charge for them”.

The idea that banks may charge checking accountholders interest provoked some outrage in the press, but you can feel free to ignore it. Here’s why: There are 6,863 FDIC-insured banks and 6,895 credit unions in this country. If Wells Fargo, Bank of America or any other of the top 5 banks tries to start charging you to hold on to your savings, just take your money elsewhere.

To me, this sounds like saber-rattling designed to convince the Fed to keep shelling out billions of dollars’ worth of risk-free returns to large banks. But while I don’t think large banks will ever actually go through with this birdbrained plan, I guess it’s possible they have so much money on hand they think they can afford to alienate depositors.

If that’s the case, there are plenty of online banks, local banks and credit unions out there that would be happy to take your money and actually pay you interest in return, while probably providing you better customer service in the process.

What do you think? What would you do if your bank started charging for deposits? Would you pay it, or move your money to another institution?

(Photo: Chris Connelly)