Banks warn Federal Reserve that if the Fed lowers Interest On Excess Reserves , the Banks may have to charge depositors - which sets off a potential nasty chain of events ....

http://www.zerohedge.com/news/2013-11-24/banks-warn-fed-they-may-have-start-charging-depositors

Banks Warn Fed They May Have To Start Charging Depositors

Submitted by Tyler Durden on 11/24/2013 15:24 -0500

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The Fed's Catch 22 just got catchier. While most attention in the recently released FOMC minutes fell on the return of the taper as a possibility even as soon as December (making the November payrolls report the most important ever, ever, until the next one at least), a less discussed issue was the Fed's comment that it would consider lowering the Interest on Excess Reserves to zero as a means to offset the implied tightening that would result from the reduction in the monthly flow once QE entered its terminal phase (for however briefly before the plunge in the S&P led to the Untaper). After all, the Fed's policy book goes, if IOER is raised to tighten conditions, easing it to zero, or negative, should offset "tightening financial conditions", right? Wrong. As the FT reports leading US banks have warned the Fed that should it lower IOER, they would be forced to start charging depositors.

In other words, just like Europe is already toying with the idea of NIRP (and has been for over a year, if still mostly in the rhetorical and market rumor phase), so the Fed's IOER cut would also result in a negative rate on deposits which the FT tongue-in-cheekly summarizes "depositors already have to cope with near-zero interest rates, but paying just to leave money in the bank would be highly unusual and unwelcome for companies and households."

If cutting IOER was as much of an easing move as the Fed believes, banks should be delighted - after all, according to the Fed's guidelines it would mean that the return on their investments (recall that all US banks slowly but surely became glorified, TBTF prop trading hedge funds since Glass Steagall was repealed, and why the Volcker Rule implementation is virtually guaranteed to never happen) would increase. And yet, they are not:

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.

Banks say they may have to charge because taking in deposits is not free: they have to pay premiums of a few basis points to a US government insurance programme.

“Right now you can at least break even from a revenue perspective,” said one executive, adding that a rate cut by the Fed “would turn it into negative revenue – banks would be disincentivised to take deposits and potentially charge for them”.

Other bankers said that a move to negative rates would not only trim margins but could backfire for banks and the system as a whole, as it would incentivise treasury managers to find higher-yielding, riskier assets.

“It’s not as if we are suddenly going to start lending to [small and medium-sized enterprises],” said one. “There really isn’t the level of demand, so the danger is that banks are pushed into riskier assets to find yield.”

All of the above is BS: lending has never been a concern for the Fed because if it was, then one could scrap QE right now as an absolute failure. Recall that as we showed recently, the total amount of loans and leases in commercial US banks has been unchanged since Lehman, with the only rise in deposits coming thanks to the fungible liquidity injected by the Fed.

Furthermore, contrary to what the hypocrite banker said that "the danger is that banks are pushed into riskier assets to find yield”, banks are already in the riskiest assets: just look at what JPM was doing with its hundreds of billions in excess deposits, which originated as Fed reserves on its books - we explained the process of how the Fed's reserves are used to push the market higher most recently in "What Shadow Banking Can Tell Us About The Fed's "Exit-Path" Dead End."

What the real danger is, is that once the Fed lowers IOER and there is a massive outflow of deposits, that banks which have used the excess deposits as initial margin and collateral on marginable securities to chase risk to record highs (as JPM's CIO explicitly and undisputedly did) that there would be an avalanche of selling once the negative rate deposit outflow tsunami hit.

Needless to say, the only offset would be if the proceeds from the deposits outflows were used to invest in stocks instead of staying inert in some mattress or, worse (if only from the Fed's point of view) purchase inert assets like gold or Bitcoin.

Which brings us back to the first sentence and the Fed's now massive Catch 22: on one hand, should the Fed taper, rates will surge and stocks will once again plunge, as they did, in early summer, just to teach the evil, non-appeasing Fed a lesson.

On the other hand, should the Fed cut IOER as a standalone move or concurrently to offset the tapering pain, banks will crush depositors by cutting rates, depositors will pull their money from banks en masse, and banks will have no choice but to close on a record levered $2.2 trillion in margined risk position.

Fed's Tarullo details plans to counter bank runs

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 Published: Friday, 22 Nov 2013 | 3:58 PM ET

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Federal Reserve Board Governor Daniel Tarullo.

Global regulators need more policy tools to counter the risk of devastating bank runs and should have powers over a wide array of market participants, U.S. Federal Reserve Governor Dan Tarullo said on Friday.

"There is a need to supplement prudential bank regulation with a third set of policy options in the form of regulatory tools that can be applied on a market-wide basis," Tarullo said at a conference on shadow banking.

He also detailed the Fed's plans to write new rules that would make it less attractive for banks to raise cash in short-term wholesale funding markets, a key factor in the collapse of Lehman Brothers in 2008.

Banks that substantially rely on short-term funding in the interbank market should be required to hold more capital on top of what is already mandated by international rules under the so-called Basel III pact, Tarullo said.

(Read more: The cost of regulation just topped $1 trillion: report)

Tarullo, who is the central bank's main policymaker on financial regulation, announced earlier this year that the Fed was working on a short-term funding rule.

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He said that international regulators should also consider ramping up capital requirements for matched books of repurchasing—or repo—agreements, which are a prominent part of the shadow banking system.

"Current versions of capital and liquidity standards do not deal with matched book issues," he said.

(Read more: Policing banks: The feds' big fail)

Thirdly, regulators should address risk in such transactions regardless of whether they were executed by banks or by other market participants, such as hedge funds.

The Financial Stability Board, in which global regulators cooperate, was already working on plans to do so, Tarullo said, but he said he disagreed with some of the details and presented some alternative ideas.