Bank of New York Mellon Corp., the world’s largest custody bank, will charge institutional clients a fee for “extraordinarily high” cash deposits to stem a flight of capital into the safety of bank deposits.
“I’ve never seen this happen, not in 25 years,” Gerard Cassidy, an analyst with RBC Capital Markets in Portland, Maine, said an interview. Other banks may follow BNY Mellon’s lead, Cassidy said.
Investors are seeking the safety of bank accounts as concern increases that the global economy may relapse into a recession and governments in the U.S. and Europe struggle with a rising debt load. A legislative stalemate last week over the U.S. debt ceiling prompted institutions to pull $103 billion from money funds in the week ended Aug. 2, the most since the bankruptcy of Lehman Brothers Holdings Inc. in September 2008.
Money market rates, which surged during the debt ceiling debate, dropped below zero percent today as Europe’s sovereign-debt crisis bolstered U.S. government securities’ appeal as the world’s safest assets. With little scope to reinvest deposits in short-term debt at a profit, banks like BNY Mellon are left with the cost of insuring the deposits with the Federal Deposit Insurance Corp.
“I suspect more banks will do this for their wholesale customers, saying we love you guys but every dollar you put in here costs us money,” said Bert Ely, a banking consultant in Alexandria, Virginia. “I’m not sure that this has ever happened in the U.S.”
BNY Mellon will charge clients 13 basis points, or 0.13 percentage point, on “excess amounts of cash based on June averages, which were already at elevated levels,” Joe Ailinger, a spokesman for the New York-based bank, said in a telephone interview.
The fee will apply to U.S. dollar deposits of more than $50 million per client, though it won’t “impact clients whose balances are consistent with prior averages,” according to a letter BNY Mellon sent to clients.
“We have seen a growing level of deposits on our balance sheet from clients seeking a safe haven in light of the global interest rate and credit environment,” the bank said in an e-mailed statement. When markets stabilize and cash levels drop “it is likely this fee will no longer be necessary,” the bank said.
A global rout in equities drove the Standard & Poor’s 500 Index to its worst slump since February 2009 today, while two-year Treasury yields plunged to a record low amid concern the economy is weakening. The S&P 500 tumbled 4.8 percent to 1,200.07 at 4 p.m. in New York. It has dropped 11 percent since July 22, the biggest loss over the same amount of time since March 2009.
Demand for short-term government debt instruments is rising after the U.S. signaled it won’t increase sales of Treasury bills even following lawmakers’ agreement to raise the debt ceiling. One-month Treasury bill rates traded at zero percent today after earlier falling to negative 0.0102 percent. They reached 0.1825 percent on July 29, the highest since February 2009.
Overnight general-collateral Treasury repurchase-agreement rates averaged 0.07 percent through 2:50 p.m. New York time, according to ICAP Plc, the world’s largest inter-dealer broker, unchanged from yesterday. That was down from 0.32 percent on Aug. 1.
The rising deposits at custody banks represent mostly “hot money” and some banks have begun to pass on the burden of insuring it to their large, institutional investors, Joseph Abate, money-market strategist at Barclays Plc in New York, wrote in a note to clients.
“All things equal, we expect this fee to push money into the bill and repo markets and drag those rates back toward zero after a recent and fleeting foray into the double digits,” Abate wrote.
State Street Corp., the third-largest custody bank, hasn’t changed its pricing on customer deposits, spokeswoman Alicia Curran Sweeney said in a telephone interview. She declined to say whether the Boston-based bank charges a fee on large deposits.
Northern Trust Corp., the third-largest independent custody bank, based in Chicago, said in a statement it hasn’t implemented a charge for clients. Alex Samuelson, a spokesman for New York-based JPMorgan Chase & Co., the second-largest custody bank, declined to comment.
Money Fund Challenge
Citigroup Inc., the third-biggest U.S. bank, doesn’t charge clients fees for placing deposits with the bank, according to a person familiar with direct knowledge of the lender’s policies.
“I’m sure a number of banks were just waiting for the first bank to go public with this,” Anthony Carfang, a partner at Chicago consulting firm Treasury Strategies, said in a telephone interview.
If other banks follow BNY Mellon’s example, investors may shift some of their cash into money-market mutual funds, said Peter Crane, president of money-fund research firm Crane Data LLC in Westborough, Massachusetts. The funds have faced a challenge in past months in finding enough securities they are eligible to buy and without lowering their yield.
“If the European problem continues to deteriorate and Europe becomes off limits and if the supply of Treasuries doesn’t rebound, it could become a problem for money funds,” Crane said.
Regulatory changes made last year by the Securities and Exchange Commission reduced the proportion of assets money funds can hold in securities that lack a top short-term rating. The supply of short-term debt from companies and banks has also dropped, according to Fitch Ratings.