Lowering Fed Interest On Deposits Could Lead To Economic Growth And/Or Elderly Ladies Being Assaulted On The Street

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Last week we learned that robbing a bank is as easy finding a Sharpie and drawing yourself a beard. Today we find out courtesy of JPMorgan that not only is it extremely easy to pull off but banks want you to take the money off their hands.

For starters, you have to realize that the banks don’t really want to be holding cash. We learned that last week when Bank of New York announced that it was going to start charging fees for large deposits. But Bloomberg reports today that BoNY’s attitude is spreading. Banks are getting huge inflows of new deposits – with U.S. bank cash totaling nearly $1 trillion as of the end of July – and have nowhere to put them since investing opportunities are few and for some reason they don’t want to refinance my mortgage at 2%. So banks are stuck parking their cash at the Fed, which pays 0.25% interest on excess reserves. But the banks face higher FDIC-insurance and capital charges on those deposits, which makes the 25bps IOER not particularly exciting:

On April 1, the FDIC changed its methodology for assessing premiums, resulting in an increased cost for most large banks. Because a deposit at the Fed is technically an asset, taking the money may stretch banks’ capital-to-asset ratios, which are watched by regulators, Joseph Abate, a money-market analyst at Barclays Capital in New York, wrote in an Aug. 5 report.

“The higher deposit cost, the potential need for additional capital and the flight-prone nature of these balances clearly outweigh the 25-basis-point return from IOER that they would earn depositing the money at the Fed,” Abate wrote. Any reduction in IOER -- a move Fed Chairman Ben S. Bernanke told Congress in July might be possible -- may create a “serial round of deposit fees” since banks would try to “push cash from their balance sheets” like a game of “hot potato.”

Cutting the Fed’s interest on excess reserves rate might seem like a stimulus measure – it could encourage banks to start lending money elsewhere because keeping cash at the Fed would be unprofitable. And even if it instead forced banks to raise deposit fees, that might not be a bad thing – theory suggests that it would have a stimulus effect, as companies that are now hoarding cash would no longer want to park it at the bank and might be forced to spend it on creating jobs or making stuff or colonizing Mars or whatever.

Which sounds good. But in a note released Friday (and titled “The Willie Sutton Stimulus Plan”), JPMorgan economist Michael Feroli explained that the Fed can’t cut the interest on excess reserves below zero* because it will lead to rivers of blood flowing in the streets:

Any bank that holds reserves can ask the Fed to debit their reserve balance and deliver currency. So the initial impact of a hypothetical imposition of negative IOER might be for banks to play hot potato with reserves -- recall that absent conversion into currency, reserves will not exit the banking system, only be reshuffled around the banking system. But ultimately, it would result in the public -- either banks or bank deposit-holders -- converting their reserves into currency. The only thing negative IOER would stimulate is a boom in bank robberies and muggings.

And that’s where you come in.

* And given FDIC fees, etc., even cutting it below 25bps may have a similar effect.

Europe’s Crisis May Stuff U.S. Banks With Undeployable ‘Hot Potato’ Cash [Bloomberg]

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Banks Prove That They Are Not Too Big To Fail By Saying "We Can Fail" On A Piece Of Paper, Moving On

One way you could spend this slow week is reading the "living wills" submitted by a bunch of banks telling regulators how to wind them up if they go under. Don't, though: they're about the most boring and least informative things imaginable and I am angry that I read them.* Here for instance is how JPMorgan would wind itself up if left to its own devices**: (1) It would just file for bankruptcy and stiff its non-deposit creditors (at the holding company and then, if necessary, at the bank). (2) If after stiffing its non-deposit creditors it didn't have enough money to pay its depositors it would sell its highly attractive businesses in a competitive sale to willing buyers who would pay top dollar. This seems wrong, no? And not just in the sense of "in my opinion that would be sort of difficult, what with people freaking out about JPMorgan going bankrupt and its highly attractive businesses having landing it in, um, bankruptcy." It's wrong in the sense that it's the opposite of having a plan for dealing with banks being "too big to fail": it's premised on an assumption that the bank is not too big to fail. If JPMorgan runs into trouble that it can't get out of without taxpayer support, it'll just file for bankruptcy like anybody else. Depositors will be repaid (if they're under FDIC limits); non-depositor creditors will be screwed just like they would be on a failure of Second Community Bank of Kenosha.