Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Panicked Savers Now Paying for Bank Deposits

Mutual funds and financial institutions may be so concerned about the direction of financial markets that they are willing to pay to stay on the sidelines.

Ordinarily, banks pay interest on cash deposits. But Bank of New York Mellon, the largest custodial bank in the U.S., announced that it would start charging customers with balances over $50 million. This indicates that the short-term demand for cash is extremely high. Which, in turn, implies that demand for almost every other kind of longer-term investment assets is extremely low.

This will almost certainly push yieldsin short-term markets down, as investors attempt to flee the penalty. It also demonstrates that, at least in the short term, large financial institutions are not concerned about inflation. Or, perhaps, their inflation concerns are outweighed by risk concerns.

Bank of New York says it will charge 0.13 percent on accounts with an average monthly balance of more than $50 million. That's 0.03 percent above the 0.10 percent the bank pays to insure deposits with the FDIC. That spread indicates that Bank of New York believes that the demand for the ability to hold wealth in cash is so great clients are actually willing to lose money to stay out of other assets.

Cash equivalents, such as Treasurys, are also under extreme pressure.

One-month and three-month Treasurys have zero yield right now—which means that they have a negative yield if you include some mild inflation adjustment.

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