A report last week that Federal Reserve officials have discussed cutting a key interest rate has raised the once-unthinkable possibility that banks could respond by charging customers for deposits.
Analysts and industry representatives say such a scenario is highly unlikely, though one official says certain businesses could be hit with deposit fees if the Fed actually cut the rate, which at least for now appears far from certain.
"We have no intention of charging for retail customer deposits," says JPMorgan Chase spokeswoman Kristin Lemkau.
At its Oct. 29-30 meeting, Fed policymakers raised the possibility of reducing the already-meager 0.25% annual interest rate on money that banks keep at the Fed, according to meeting minutes released last week. The issue arose during a discussion about how to taper the pace of the Fed's economic stimulus program as the economy improves while also signaling the Fed's intention to keep rates low to further support the recovery, the minutes said.
Trimming the interest on excess bank reserves also theoretically could prod banks to lend their money instead of parking it at the Fed. At the meeting, "most" policymakers thought a cut in the rate "could be worth considering at some stage," though the benefits "were generally seen as likely to be small," according to the minutes.
In a report, Goldman Sachs economist Kris Dawsey says the probability of a reduction in the interest rate "has increased somewhat," adding he thinks the Fed will ultimately decided not to pursue it. One risk, he says, is that the move "could prompt charges ... on bank deposits."
Deposits in regular savings accounts currently pay consumers paltry interest of about 0.1% to 0.2%. Banks earn profit on the money in part by receiving a higher rate to keep it at the Fed. But if the Fed's interest rate falls even further toward zero, the premium that banks pay to the Federal Deposit Insurance Corp. to insure deposits could exceed the return, potentially forcing banks to levy a fee avoid losses.
Analyst David George of Robert W. Baird & Co. says banks "would need to find alternative revenue sources to compensate" for a decline in the Fed's interest rate and fees on deposits "would be the most likely" option. "Having a bank account is a service, like the water and electric bill. And it has become less and less profitable," he says.
But analyst Jeff Harte of Sandler O'Neill says a new fee is unlikely, noting banks depend on deposits to finance loans, a benefit that will become more significant as the economy heats up. Banks also rely on deposits to sell customers services such as car loans.
Wayne Abernathy, executive vice president of the American Bankers Association, says banks could respond to a drop in the Fed's interest rate by charging a fee to large business customers that hold millions of dollars in savings accounts. Banks, he says, must bear the expense of managing that money.