Charge for Deposits? Not Likely, Experts Say
Would members pay to make deposits to their credit union share accounts?
That question may soon be up for debate depending on what happens at the next Federal Reserve Board meeting.
The continued sluggish economic recovery is causing the Fed to consider policy changes designed to better stimulate the economy. The Federal Open Market Committee discussed several scenarios at its Oct. 29-30 meeting, including cutting the 0%—0.25% rate the Fed currently pays banks and credit unions on the $2.4 trillion in financial institution reserves being held at the Fed.
Economic experts interviewed by Credit Union Times said the goal of such a step would be to move the money out of Fed coffers and into the open market, where its distribution through loans to consumers would better bolster the soft economy. Reducing the Fed’s role in economic stimulus also would more effectively contain the threat of hyper-inflation if the economy continues to struggle.
Several banks already have indicated that if the rate is cut, they may start charging depositors. Custodial bank BNY Mellon already charges its corporate banking clients a fee for more than $50 million in deposits, primarily to cover the cost of insurance.
However, experts said a negative interest scenario likely will not happen and, even if it does, the impact on many institutions will be limited to nonexistent.
“I am not sure where the notion of a negative federal funds rate comes from,” said Thomas Simpson, a former Fed economist and current executive in residence at the University of North Carolina–Wilmington. “The Fed reached the zero lower boundary in December 2008. It cannot do much more to lower the funds rate.”
The final verdict on this and other potential measures may be discussed at the Fed’s upcoming meeting Dec. 17-18. Until that time, experts can only speculate on how the Fed’s next steps will affect their institutions.
“Talk of cutting the reserve rate has been around for a couple of years and it pops up every now then,” said Dwight Johnston, chief economist for the California and Nevada Credit Union Leagues, located in Ontario, Calif.
Johnston believes such a change would be a long time coming. “If the Fed does act on it, I don’t see it having a huge impact on credit unions because big money center banks would be the first to test the waters.”
Since it’s likely such an action, if taken, would happen in steps, credit unions could wait for the banks to apply fees to deposits and see how well the idea floats, Johnston said. Even if a rate cut does come to pass, it would be little more than a ripple for many credit unions.
Credit unions with strong loan programs could withstand a cut in Fed rates without having to charge depositors a fee, since they would be able to make up the difference from loan rates, Johnston said. Small cash-heavy credit unions, on the other hand, might consider reducing deposits by charging for them as an effective strategy to curb the wrong type of financial growth.
“A credit union’s response will depend totally on its balance sheet,” Johnston said. “You can’t shrink your way to long-term growth, but you can do so from time to time to preserve your capital and increase net earnings.”
Many don’t think the Fed has any intention of cutting rates to stimulate growth. In fact, such a move would be detrimental to the overall market and consideration of it is little more than sabre rattling by an agency charged with stimulating economic growth, according to Brian Turner, director and chief strategist for Catalyst Strategic Solutions, part of Catalyst Corporate Federal Credit Union in Plano, Texas.
“In terms of monetary policy, the Federal Reserve launched all of its missiles in 2008 when it initially dropped the oversight rate to 0.25%,” Turner said. “Anything beyond this point is window dressing to give the appearance that the FOMC is trying to do something to stimulate the economy by taking an action.”
Prior to 2005, there was an overwhelming belief that money markets could not function when rates dropped below 1%, and to do so would disrupt the overall financial system, Turner said. That concern has been quashed over the past five years with historically low money market rates. So, too, with the current Fed rate paid on excess reserves, which appears to be preventing market dysfunction.
“The problem the Fed has is that economic growth, especially consumer spending behavior, is not rate-sensitive,” Turner said. “Members continue to suffer job insecurity and have been curtailing their spending, particularly on big ticket items such as cars, homes and appliances, all items to which credit unions extend financing,”
Economic recovery is directly tied to improvements in employment and household wealth and won’t be tempted by interest rates, Turner said. Charging for deposits would be a small concern given the other economic issues consumers and credit unions face.
Negative interest rate environments, although largely new to the U.S., have occurred in other countries, particularly in Europe, according to Dan Geller, executive vice president of Market Rates Insight, a San Anselmo, Calif., consulting firm.
“The European central banks started offering negative interest rate on fund rates, but it’s not a very common strategy,” said Geller. “In the case of the Fed, it’s more likely they will try other things before going negative on the funds rate.”
Reducing the Fed repurchase of long-term bonds from its current $85 billion per month was another area the FOMC said was worth considering. But cutting the interest rates still remains a possibility.
The issue may have philosophical as well as a practical side, the consultant said.
“Is it possible that we are witnessing a paradigm shift in the way consumers view deposits?” Geller asked. “Are consumers starting to view deposits purely from an insurance perspective as opposed to seeking interest income?” The answer remains to be seen.
“After the Fed meeting this month we’ll all be much smarter,” he said, “and their decision will pave the way to 2014.”