BNY Mellon Deposit Charge Is Latest Sign of Bulging Coffers

Theorists have toyed with the idea of making banks pay interest on reserves they keep at the central bank — and thereby forcing them to lend more — but it appears that the industry has beaten policymakers to the punch.

Bank of New York Mellon Corp.'s decision to begin charging fees to certain large depositors who maintain unusually high balances comes amid a flood of cash that is starting to rival the surge seen during the height of the financial crisis.

BNY Mellon's move is a sharp departure from the note sounded by Jamie Dimon, JPMorgan Chase & Co.'s chief executive, in July when he shrugged off as a concern margin pressure from a jump in deposits not matched by growth in high-yielding loans. "We have profits and we have clients. So the clients have deposits, you don't really want to turn them away if they're good clients," Dimon said, speaking on the company's earnings call.

Those comments came before the government default scare reached full boil, and before fresh waves of panic over the future of Europe added momentum to the flight to cash.

The BNY Mellon fee illustrates the mounting pressure being exerted by the unprecedented amount of liquidity sloshing around the banking system. Faced with an influx of money that could stream out as suddenly as it arrived, banks are being forced to maintain big pools of liquid assets. To a large extent, that means central bank reserves paying 25 basis points in interest, and potentially negative returns on deposits after federal insurance assessments and other costs.

To be sure, after spiking, yields on short-term instruments, like Treasury bills, quickly retreated as politicians reached a budget deal. Asset allocations again appeared to be returning to precrisis levels. Then came the BNY Mellon announcement, which the company has been downplaying. "As markets return to normal, we expect deposits will trend lower and the fee will no longer be necessary," a spokesman said.

Still, Joseph Abate, an analyst at Barclays Capital, reckoned in a note that deposit fees like BNY Mellon's, if adopted widely, could push rates on other short-term instruments below zero.

The message from banks to the money market funds and the rest of the shadow system: start lending again.

Risk Management