Top Wall Street executives have a big challenge in this year's regulatory exams, which banks are expected to complete in coming days.
For the first time, they have to factor in the possibility that the Fed reverses course and embraces negative interest rates — which will pile new stress onto banks in the regulators' list of Systemically Important Financial Institutions, or SIFIs. But the hypothetical scenarios, if they ever merge with reality, won't just create headaches on Wall Street. Banks may have no choice but to pass some of the effects of negative interest rates on to their customers, from large corporate accounts to consumers on Main Street.
Michael Alix, financial services advisory risk leader at PricewaterhouseCoopers and former New York Fed senior vice president, said one option for banks in a NIRP environment includes passing losses of negative interest to some customers, but not to others. This means corporate accounts would potentially be subject to negative interest rates, which would cost depositors, but not individual customers, whose balances are far smaller.
"The bank may very well treat consumers differently," Alix said. "Different banks may have different strategies dealing with those clients."
The rationale is simple, said Deloitte & Touche financial services advisory leader Alok Sinha. While some consumers are expected to bleed accounts dry and stash cash under a mattress, rather than pay a nominal fee in world devoid of savings interest, corporate clients cannot do this with their cash. However, if it's a move the industry makes in lockstep — similar to how quickly Wall Street banks moved to increase the prime rate after the Federal Reserve's December 2015 rate hike — it would likely be easier for even their biggest customers to digest.
But Main Street consumers wouldn't be exempt from the impacts of interest rates hypothetically going negative.