Tuesday, November 26, 2013

Banks Set To Charge You For Holding (and Using) Your Money

Following on the FT.com article yesterday, the WSJ starts discussing what I think is probably one of the most glaring aspects and ramifications coming out of the Federal Reserve's October meeting, i.e. the potential cut in the interest rates bank receive for keeping reserves at the Federal Reserve. The banking industry was most vocal of the groups jumping on this possibility (and at some point inevitability), stating they may have to charge depositors for the 'privilege' of safeguarding and using their money.

We can argue the moral implications of such an act, but the more important complications of this is that any rational entity will just drain their deposits from the banking system. Not only could this strain banking balance sheets, as deposits are usually the lowest cost of funding (and just think, charging for deposits will essentially change an interest expense liability to a interest bearing asset), but will also increase the demand for money. If the demand for money increases, the game of monetary hot potato will get interesting in a hurry and we will not be talking about an ever decreasing velocity of money figure.

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