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US bank paying negative yield?

By Claes Bell ·
Thursday, August 4, 2011
Posted: 3 pm ET

If you're wondering why the Dow Jones has been down more than 400 points at times today, it's mostly because of scary developments in the European debt crisis. Basically, yields on Italian and Spanish government bonds are rising and their prices are falling, putting pressure on those countries' governments and their banks, which hold large quantities of their respective governments' bonds.

But stockholders aren't the only American consumers being affected. The massive flight from Europe toward presumably safer investments may have consequences for American depositors.

That's because, for all the derision that's been focused on the American political and financial system in recent months, most of that flight to safety is ending at the doors of U.S. banks. In fact, one bank, Bank of New York Mellon, is so flooded with deposits it told large depositors this week it would soon start charging them for holding their cash. That's right: They're offering a negative rate of return to some of their biggest global clients.

From Liz Rappaport at The Wall Street Journal:

The big U.S. custodial bank said this week in a note to clients that it will begin slapping a fee next week on customers that have vastly increased their deposit balances over the past month.

The bank cited the heavy dollar deposits it has received over recent weeks, as investors and corporations retreat from financial markets amid Europe's debt crisis and the recent debate over U.S. government borrowing.

"In a way they're pushing out this hot money that came in over the last couple of weeks, or at least trying to offset their expenses associated with taking it in," said Brian Smedley, a rates strategist at Bank of America Merrill Lynch. "This has led to lower front-end rates across the board."

Now, of course, most consumers don't come anywhere close to the $50 million threshold that will draw a negative interest rate from the bank, but this doesn't augur well for U.S. consumers just trying to earn a decent, risk-free return on their FDIC-insured deposits.

After all, if global investors are rushing to put their cash in American banks regardless of return, why would they offer American depositors a decent return on their CDs and savings accounts?

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