“Overall, about $4 trillion in deposits at banks in the U.S. were uninsured, covering more than 3.5 million accounts, according to Federal Deposit Insurance Corp. data.”, Wall Street Journal
“We need much higher capital levels. And we need a credible resolution mechanism to make sure the market takes the losses and the market understands that in advance. Those are the two places where I would focus. The market can discipline these institutions. The regulatory process cannot.”, former Federal Deposit Insurance Chairwoman, Sheila Bair, “The State of the U.S. Financial System”, Wall Street Journal
“How about starting with mandating that banks (and other federally-insured depositories) label and disclose to their customers, especially individuals and small firms, whether their deposit amounts are insured or not (on their bank statements)? Banks today have the automated systems to be able to implement this simple but important disclosure accurately and with relative ease and at a reasonable cost (mostly one-time). Is this simple and logical disclosure being held up by the FDIC because if a bank fails, they don’t want to stand behind the bank’s deposit account insurance disclosures (because in theory the bank could have disclosed them incorrectly), and the FDIC could suffer some losses as a result? I think this might be the case. It’s the only reason I can think of (beside big bank lobbying against it, as they hold the bulk of uninsured deposits). It is an issue, but I think it’s a relatively small issue, as the FDIC can audit banks to ensure this reporting is accurate. In regards to deposit account insurance disclosure for consumers, Consumer Financial Protection Bureau, where are you? Pre-crisis, if this type of disclosure had been in place, bank runs like IndyMac’s would likely not have occurred, because only the small percent of deposits that were uninsured would have withdrawn their funds in a panic. (As I understand it, over 90% of the deposits withdrawn at IndyMac were fully insured by the FDIC.) To state it plainly, I believe the FDIC’s longstanding policy of not requiring banks to disclose to their customers (on their bank statements) the amount that is insured and uninsured (and further, not standing behind this disclosure), creates unnecessary fear and uncertainty, and is the primary cause of modern-day bank runs at struggling institutions.”, Mike Perry, former Chairman and CEO, IndyMac Bank
Banks Ask Big Firms To Move Out Cash
By Kirsten Grind, James Sterngold and Juliet Chung
Banks are urging some of their largest customers in the U.S. to take their cash elsewhere or be slapped with fees, citing new regulations that make it onerous for them to hold certain deposits.
The banks, including J.P. Morgan Chase & Co., Citigroup Inc., HSBC Holdings PLC, Deutsche Bank AG and Bank of America Corp. , have spoken privately with clients in recent months to tell them that the new regulations are making some deposits less profitable, according to people familiar with the conversations.
In some cases, the banks have told clients, which range from large companies to hedge funds, insurers and smaller banks, that they will begin charging fees on accounts that have been free for big customers, the people said. Bank officials are also working with these firms to find alternatives for some of their deposits, they said.
The change upends one of the cornerstones of banking, in which deposits have been seen as one of the industry’s most attractive forms of funding, said more than a dozen corporate officials, consultants and bank executives interviewed by The Wall Street Journal.
Deposits have traditionally been a crucial growth engine for banks. Banks generally pay depositors one interest rate and then make loans with higher rates, often collecting fees in the process. But deposits also can be withdrawn at any time, potentially leaving a bank short of cash if too much money is removed at once.
The new rule driving the action is part of a broader effort by U.S. regulators and policy makers to make the financial system safer. But the move may inconvenience corporations that now have to pay new fees or look for alternatives to their bank.
Sal Sammartino, vice president of banking at Stewart Title, a unit of Stewart Information Services Corp. , a global title insurance company based in Houston, said he has had sleepless nights in recent weeks as he has negotiated with large banks to try to keep the firm’s deposits there. He declined to name the banks.
“Ultimately my balances aren’t as profitable for the banks, and that’s going to impact my business,” he said.
In an environment of slow economic growth with fewer opportunities to make loans and ultralow interest rates, some banks feel they have too much money on deposit.
Some banks, including J.P. Morgan and Bank of New York Mellon Corp. , have also started charging institutional clients fees to hold euro deposits, mainly driven by the European Central Bank’s move to make firms pay to park their cash with the ECB. BNY Mellon recently started charging 0.2% on euro deposits. State Street Corp. said in its third-quarter earnings call in October that it planned to begin charging fees later this year on euro deposits.
U.S. banking rules set to go into effect Jan. 1 compound the issue, especially for deposits that are viewed as less likely to stay at the bank through difficult times.
The new U.S. rules, designed to make bank balance sheets more resistant to the types of shocks that contributed to the 2008 financial crisis, will likely have little effect on retail deposits, insured up to $250,000 by federal deposit insurance. But the rules do affect larger deposits that often come from big corporations, smaller banks and big financial firms such as hedge funds.
Overall, about $4 trillion in deposits at banks in the U.S. were uninsured, covering more than 3.5 million accounts, according to Federal Deposit Insurance Corp. data.
The rule primarily responsible involves the liquidity coverage ratio, overseen by the Federal Reserve and other banking regulators. The new measure, as well as some other recent global regulations, are designed to make banks safer by helping them manage sudden outflows of deposits in a crisis.
The banks are required to maintain enough high-quality assets that could be converted into cash during a crisis to cover a projected flight of deposits over 30 days.
Because large, uninsured deposits would be expected to leave most quickly, the rule will now require that banks maintain reserves that they cannot use for profitable activities like making loans.
The new rules treat various types of deposits differently, based on how fast they are likely to be withdrawn. Insured deposits from retail customers are regarded as more safe and require that banks hold reserves equal to as little as 3% of the sums.
But the banks must hold reserves of as much as 40% against certain corporate deposits and as much as 100% of some big deposits from financial institutions such as hedge funds.
Some corporate officials said the new rules could make it more expensive for them to keep money in the bank or push them into riskier savings instruments such as short-term bond funds or uninsured money-market funds.
“You’re going to see a lot of corporations that have had much simpler portfolios that are going to move toward more sophisticated portfolios,” said Tory Hazard, president and chief operating officer of Institutional Cash Distributors, a broker to large clients looking for places to hold their cash.
Some bankers said they are advising corporate clients to break up large deposits across several banks, including smaller ones not affected by all of the new rules. Others might be attracted to other products offered by banks or products being created by asset managers.
Some customers are negotiating for a reduction in the fees, said people familiar with the discussions.
J.P. Morgan told some clients of its commercial bank recently that it would begin charging monthly fees on deposit accounts from which clients can withdraw money at any time. The new charges will start Jan. 1 for U.S. accounts, according to an Oct. 21 memo reviewed by the Journal, and later for international accounts.
“New liquidity and capital requirements have changed the operating environment and increased the cost of doing business with financial institutions,” the memo read.
The change affects some hedge-fund customers, rather than corporate accounts. The charges include items such as a $500 monthly account maintenance fee for demand deposits and a $25 charge per paper statement.
Larger clients with broad, long-term relationships with their banks may get a break on the new fees, according to people familiar with the situation. Banks also are likely to differentiate between clients’ operational deposits, used for things like payroll, and excess cash that can be pulled more easily, the people said.
At a National Association of Corporate Treasurers conference in October, consultant Treasury Strategies noted that the new rules “will redefine the economics and dynamics of corporate banking relationships.”
Some argue that while it is a good policy on its face, the rule potentially magnifies problems in a recession by encouraging banks to hoard high-quality assets, potentially paralyzing markets for these assets such as Treasury securities and some corporate bonds.
“This proposal, which is supposed to promote financial stability, actually does the opposite,” said Thomas Quaadman, a vice president at the U.S. Chamber of Commerce.
Thomas Deas, treasurer at chemicals company FMC Corp. said dialogue is increasing between banks and corporate clients as company executives get their arms around the potential new fees.
Robert Marley, assistant treasurer at EnerSys Inc., a maker of industrial batteries in Reading, Pa., said he was recently told by banks that his company would need to move cash that had been sitting in short-term deposit accounts in Europe or face new fees. “I’m not happy about it,” he said.