Thursday, August 4, 2011

Is BNY Mellon Bank Really Charging a Negative Interest Rate?

Bank of New York Mellon Corp. is preparing to charge some large depositors to hold their cash, WSJ is reporting. Some are calling this a negative interest rate. This is very misleading.

Given the panic in the markets, some institutions, like money market funds, do not want to speculate in the markets and simply want to keep a large portion of their funds as cash. They do this, for example, because they don't know in advance how much in withdrawals they may face during a panic. They want to be ready.

But they are dealing in huge numbers, in the neighborhood of $50 million at a time. So it isn't going to be the case that a mutual fund is going to send a couple of junior executives to pick up $50 million in cash. The logistics would be a nightmare. So they need someone to store it, just like they would have to do if they were storing $50 million in gold. No one would think twice about the fact that a mutual fund would have to pay a storage fee for anyone storing and guarding it's gold.  The same is the case with the storage of cash (physical and electric)

On the other hand, this panic money is very dangerous for a bank like BNY Mellon to hold for a client, It is hot money. It could be on deposit today, but gone tomorrow. Thus, there are severe limitations on where it can be loaned out. Also there is an FDIC insurance fee of 0.13% and possibly capital charges that a bank will have to pay against such a deposit. This means, while there are limitations as to where the money can be loaned out, there are significant fixed costs for the bank to hold that money. Thus, the fees. It is not so much that a money manager has $50 million in cash and in disgusts says, "Here I don't want this money, I will pay you to take it off my hands". It is more a case of, "Hey, I need a place to store some money, safe and secure, just in case I need it immediately, how much will you charge to hold it for me?"

Is this a "negative interest rate?' Not really, it's a storgae fee.


  1. Perhaps the clients should turn that counterfeit crap into gold and pay a storage fee instead....

  2. If it's a storage fee (which I'd agree) then it should immediately cause everyone to ask "Why don't I have to pay a storage fee at all the other banks where I believe I am storing my money for safekeeping?"

  3. How much storage space does a digit really take?

  4. It's also stupid to even bother paying the storage fee. All these banks have such poor reserve ratios that if there ever was a run, the chances of you even getting your money back are slim to none.

    Wait, I forgot about Helicopter Ben...

  5. It's a bank. This is part of the cost of doing business (for the bank, not the depositor). Its really that simple. If the bank CHARGES you to hold it (instead of the other way around), and the only security they are truly offering is the FDIC (HA!), then may I suggest an alternative: a safe.

    Otherwise, what is the point of the bank?

  6. A couple bytes in a database file on a hard drive somewhere is incredibly expensive these days!!!