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

A Yellen rate reversal would hurt Wall Street banks

Janet Yellen
Andrew Harrer | Bloomberg | Getty Images

If the Federal Reserve decides to adopt a negative interest rate policy to avoid a recession, Wall Street banks will feel the pain.

The four biggest consumer banks in the U.S. — Wells Fargo, JPMorgan Chase, Bank of America and Citigroup — could stand to lose billions in revenue on what they earn on their massive deposits at the Fed if the central bank decided to go negative.

Together, the banks earned $5.85 billion in interest on $911 billion in deposits held at the Federal Reserve in 2015, according to S&P Global Market Intelligence U.S. banks analyst Erik Oja.

"The $5.85 billion these banks earned would be reduced a lot," he said.

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Oja said that, for the banks, the interest on bank deposits at the Fed accounted for about 1.7 percent of their combined revenues.

In remarks Thursday to a Senate committee, Fed Chair Janet Yellen acknowledged the central bank is taking a look at the possibility of reversing course and potentially going to negative rates for interest on excess reserves.

"In light of the experience of European countries and others that have gone to negative rates, we're taking a look at them again, because we would want to be prepared in the event that we would need (to increase) accommodation. We haven't finished that evaluation. We need to consider the institutional context and whether they would work well here. It's not automatic," she said, adding, "we wouldn't take those off the table, but we have work to do to judge whether they would be workable here."

On Friday, New York Fed President William Dudley said he thinks it is "premature" for the central bank to start talking about a rate reversal.

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Deutsche Bank chief U.S. economist Joseph LaVorgna said he believes a return to quantitative easing is less likely than a move to negative interest rates. But his assessment of NIRP's impact on Wall Street banks is not rosy.

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If the Fed reverses course and adopts negative rates, LaVorgna said, it is likely that they would remain below zero for at least a year while the U.S. economy rebounds from what some say is the precipice of a recession. And the reversal of capital from the Fed to Wall Street banks would prove painful, the longer NIRP continues.

"The probabilities are low, but they are rising" that the Fed will make the unprecedented move to negative interest rates, he said. "It seems to me the Fed is going into uncharted territory."

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If and when the Fed makes the move to NIRP, bank stock charts could once again be pointing down.