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Banks Warn on Negative Interest Rates

The FT has a good piece on the potential negative ramifications of paying negative interest rates on reserves:

“Leading US banks have warned that they could start charging companies and consumers for deposits if the US Federal Reserve cuts the interest it pays on bank reserves.

Executives at two of the top five US banks said a cut in the 0.25 per cent rate of interest on the $2.4tn in reserves they hold at the Fed would lead them to pass on the cost to depositors.”

That’s expected.  It’s important to understand the dynamic here.  As I explained long ago, banks don’t lend their reserves (except to one another) so the impact of negative interest rates impose a tax on the banking system that reduces margins and will likely force banks to pass on the extra cost to their customers in various ways:

“Banks cannot get rid of reserves [in the aggregate]. As the NY Fed mentioned in the quote, only the Fed can control the amount of reserves. So charging banks a negative interest rate is a tax that likely just gets passed on to customers in other various ways. It has no impact on whether the banks use these reserves (which they don’t for lending).”

David Schawel also had some good thoughts on this last week.  

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