BNY Mellon Slaps Fee on Big Deposits

Negative interest rate reflects unlimited FDIC insurance and flight from money markets.

BNY Mellon is starting to charge customers whose balance exceeds an average of $50 million a month, the bank confirmed. It will put in place a fee of 13 basis points on the excess balances, and could increase that fee if Treasury bill rates go negative.

“In the past month, we have seen a growing level of deposits on our balance sheet from clients seeking a safe-haven in light of the global interest rate and credit environment,” the bank said in a statement. It noted that “Clients who maintain routine deposit levels will not be affected.”

The new fees were predicted in an analysis released last week by consultancy Treasury Strategies and reported today by the Wall Street Journal.

Anthony Carfang, a partner at Treasury Strategies, says BNY Mellon’s fee reflects the distortions caused by the unlimited Federal Deposit Insurance Corp. coverage available on bank deposits through the end of 2012, and the relatively low premiums the FDIC is charging.

Carfang compares FDIC premiums to the cost of buying a credit default swap on U.S. Treasury bonds, which traded around 60 basis points last week. “The cost of insuring a U.S. Treasury bond for one year was 60 basis points, yet the cost of the FDIC guaranteeing a deposit, which is basically the same thing, is only 10 basis points,” he says. “So naturally you would have a huge flow of funds out of the market and into the banking system.”

In its statement, BNY Mellon argued that the fee will eventually become unnecessary: “As markets stabilize, we expect deposit levels will trend lower as they are redeployed into the markets.”

But Carfang says that for now, many uncertainties remain. Although the debt-limit legislation has been passed, it’s only a temporary fix, and treasurers still face the possibility of a U.S. downgrade and the growing debt crisis in Europe.

“We know $100 billion moved out of money market mutual funds last week, probably all into bank deposits,” he says, adding that the news of BNY Mellon’s move could encourage more companies to move assets into bank deposits.

“I think the fact that BNY Mellon has gone public with their negative interest rate—they call it a fee—will cause more money to flow into the banking system,” Carfang says. “Folks are going to look at this and say, ‘Wow, something doesn’t smell good. Shouldn’t we have our money there too?’”

 

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