By Dave Anderson:
Insurance is an exchange of a small guaranteed loss (the premium) in order to prevent a very large but uncertain loss (the insured amount). Insurance companies make their money because people are risk averse and are willing to pay above statistically accurate amounts to avoid getting wiped out. They offer security and they make money doing so.
The Bank of New York-Mellon also offers security. It offers other banks the assurance and the credibility that any money they deposit with BNY-Mellon will be there when the depositor wants to withdraw or transfer that money. In normal times, BNY-Mellon makes their money on the float, the difference in their interest rates and other short term risk-free interest rates. The security value of BNY-Mellon is not normally too valuable nor unique. Right now, these are not normal times. Very short term rates are within basis points of zero, and default and major bank bankruptcies are in the air. Security has become valuable.
Reuters reports that BNY-Mellon is beginning to charge for the security value of their services:
BNY Mellon said the fee would be imposed on big corporate and asset management clients that deposit more money than average, because it has been overwhelmed by deposits.
Global economic turmoil -- including the Greek debt crisis and the U.S. debt ceiling debate -- has driven BNY Mellon's large clients to sell riskier assets and move the proceeds to deposit accounts.
The influx of cash is likely to raise BNY Mellon's U.S. deposit insurance fees and could weaken capital ratios, which are partly based on liabilities such as deposits....
The Federal Reserve also performs the security function for large amounts of cash in excess bank reserves. The Fed typically (pre-2008) had a relatively small amount of cash on hand in excess bank reserves but after 2008, excess bank reserves exploded at the Federal Reserve as the Fed was safe and more importantly, the Fed was paying interest on those reserves desite the fact that the closest substitutes (funny pieces of paper and US Treasury paper were effectively paying pennies per year per hundred dollars deposited. Now short-term US debt is a guaranteed money loser but it guarantees the money will be there at the end of the month.
So why is the Fed giving away its services as a secure depository instead of charging for that service?
Financial institutions don't make money on deposits only on loans so when they are not making loans reverse interest only makes sense. A couple of credit unions here in the Portland area have quit accepting new customers because they can't make money.
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