Will ‘Too Big to Fail’ Banks Charge For Deposits?

$82 billion.

What does that figure represent? The subsidy (aka competitive advantage) that accrues to our major banking institutions from favorable borrowing rates given their status as institutions that are ‘too big to fail.’

That figure represents a nice big head start for a handful of banks and a withering assault on the precepts of free market capitalism.

As if $82 billion were not enough of a subsidy, let’s not forget that these banks pay you as a depositor virtually zero interest for the ‘privilege’ of holding your deposits there. Well, that may be changing. How so? How would you like to have to pay the banks a small amount of interest in order to keep your money in their institution? Really? No way? Yes way.

Although you might think paying banks to hold your deposits is a scenario straight from The Twilight Zone, I would view it as more the price of protection imposed by those seen at work in the all time classic, The Godfather. Let’s navigate as the Financial Times sheds light onto a practice that smells like extortion,

Leading US banks have warned that they could start charging companies and consumers for deposits if the US Federal Reserve cuts the interest it pays on bank reserves.

Depositors already have to cope with near-zero interest rates, but paying just to leave money in the bank would be highly unusual and unwelcome for companies and households.

The warning by bank executives highlights the dangers of one strategy the Fed could use to offset an eventual “tapering” of the $85bn a month in asset purchases that have fuelled global financial markets for the last year.

So while the Federal Reserve knows that it needs to begin tapering its printing press of $85 billion a month in its quantitative easing program, it is trying to figure out a means of further supporting the economy. The Fed hopes that a lowering of the rate it pays banks on their reserves would motivate the banks to put that money to work in the economy and generate a degree of velocity in the money supply from the current anemic levels.

The banks response that they would simply pass this lowering of rates along to depositors is indicative of the fact that our major banks are nothing more than an oligopoly that possess enormous pricing power.

As if an $82 billion subsidy and an ongoing wealth transfer from savers into the banks were not enough, the prospect that depositors might actually have to pay banks to hold their funds strikes me as being all too similar to the costs borne by many a small business that buy ‘protection’ imposed upon them from those running rackets.

And all this from an industry whom the American taxpayer bailed out a mere 5 years ago.

Friends like these who needs enemies.