Earlier this month it was reported Bank of New York Mellon will begin charging its largest customers (e.g. corporations and large institutions) a fee for deposits in excess of $50 million. Recently, I have received several questions as to why a bank would charge its customers for deposits. While this seems counterintuitive to some, in the banking world a sudden influx of cash deposits is not necessarily a good thing.
As a result of the global economic uncertainty and the renewed concerns of some major European financial institutions, several major U.S. banks have experienced an influx of deposits. When a bank receives a deposit, that deposit is considered a liability of the bank since the depositor can withdrawal the funds at any time. This liability presents several challenges to the bank, two of which are briefly outlined below.
To increase consumer confidence in their institution, most banks are members of the FDIC, which insures customer deposits up to a certain level. The banks pay the FDIC a fee partly based on the size of its liabilities. It’s now easy to see one result of the recent influx of deposits: Higher FDIC insurance fees. During normal times, this is not a problem as the FDIC fees are small enough that the banks can offset them by investing the deposits in instruments yielding more than the cost of the FDIC fees. However, the recent influx of deposits is thought to be temporary and the concern is that the funds will be withdrawn once confidence returns to global economy and the European financial institutions. With interest rates so low, there are few ways for the banks to invest the funds to offset the FDIC insurance fees.
Another major concern for banks is maintaining their required capital ratios. Regulation only permits banks to be leveraged to a certain extent. The increase in deposits (liabilities) could compromise these requirements if the massive inflows continue.
While it is doubtful the “average” consumer will experience deposit fees like the one Bank of New York Mellon now charges its largest customers, it is clear banks are facing very unusual times as a result of the global uncertainty.