The Financial Times, a British publication, has run an article saying that two unnamed officials at two unnamed large American banks say that any move by the Federal Reserve System to eliminate the paltry interest rate of no higher than 0.25% on excess reserves will lead banks to start charging for free checking accounts.
Excess reserves are accounts held by commercial banks at the Federal Reserve. This money does not enter the economy. This in turn keeps the money from multiplying through the fractional reserve banking system. It keeps price inflation low.
Why couldn’t banks lend this money to businesses? No deal, says one of these unnamed bankers. “It’s not as if we are suddenly going to start lending to [small and medium-sized enterprises]. There really isn’t the level of demand, so the danger is that banks are pushed into riskier assets to find yield.”
Let me interpret this. “Today, four years into the so-called economic recovery, businessmen still are unwilling to borrow money — not even at historically low interest rates.”
Some unnamed Federal Reserve officials have said that the FED can save money by stopping these payments. The response by the two unnamed officials at the unnamed banks is a counter-threat.
“Right now you can at least break even from a revenue perspective,” said one executive, adding that a rate cut by the Fed “would turn it into negative revenue – banks would be disincentivised to take deposits and potentially charge for them”.
There are actually senior banking officials who use the word “disincentivise.” This is a bad sign.