In this joyless era of return of capital, people are keen to let banks hold their money for nothing. Increasingly, though, banks can ill afford that seemingly heads-I-win, tails-you-lose proposition.
(Go ahead and shake your head like the Aflac duck for a minute or two.)
On Thursday, the ECB took its benchmark rate down to a record low of 0.75 percent and its deposit rate to zero. JPMorgan Chase (JPM), Goldman Sachs (GS), and Blackrock responded not by lapping up supposedly free investor cash—but by closing their European money market funds to new investments. Surprise: It’s actually costly to warehouse clients’ short-term, liquid cash, what with all the administrative expenses involved. Throw in the relentlessly stingy interest-rate environment, and you’d be hard-pressed not to lose money in that line of work. Morgan, the world’s top money-market fund provider, posted an explanatory FAQ and memo to clients. Goldman wrote a notice to fundholders: “The European market environment is in unchartered territory with such historically low—or even negative—yields for high-quality issuance. It is not currently feasible for our portfolio managers to deploy capital without substantially diluting the yield for the existing base of shareholders.”
With global interest rates at or near record lows—some are outright negative—money funds have been struggling to skim a living wage (and pay the Keurig bill) from what used to be the business of investing client cash assets. The U.S. Federal Reserve has been at a zero interest rate policy for three and a half years. Managers who have remained in the $2.5 trillion U.S. money fund business have had to resort to cutting their fees to keep customer returns above water. According to Crane Data, money-market manager revenue has tumbled from about $12.5 billion in 2008 to $4.7 billion now—as yields that hit 5 percent in 2007 now average 0.06 percent.
It’s all part of a battle of wills between central banks and risk-averse masses that have been clinging ever harder to their cash as the U.S. and Europe continue to post scary economic news. Monetary policy makers desperately want that cash to be put to constructive use: Eat out; buy a lawnmower or family sedan; expand your business; take out a mortgage; plunk down a couple of grand on stock ETFs. Do something—anything—but hoard cash that desperately needs to circulate around the system.
The banking system, which strains under the weight of trillions in short-term deposits, has been crying uncle for quite some time now. A year ago, Bank of New York Mellon, the world’s largest custody bank, announced plans to start charging clients for cash balances above $50 million “to pass on costs incurred from sudden and significant increases in U.S. dollar deposits.”
Time and again, fear and risk aversion prevail. Rates fall and stay ever lower, and central banks try to jackhammer down any bump on the yield curve that could appeal to fresh funds. Still, more cash—damn cash—floods the system. It’s the economic conundrum of our times: Those who desperately need affordable capital (Spain, U.S. small businesses, struggling homeowners) just aren’t getting it, while institutions that are being deluged with seemingly no-cost dollars, euros, francs, and kroner beg for it to go away.