It's bad enough that CD rates are, as my colleague Sheyna Steiner wrote a few weeks ago, approaching zero percent in a lot of cases. But could banks go past zero and actually end up charging CD investors to safeguard their cash?
I don't think the average CD investor has ever even considered the possibility that negative CD rates could ever make their way to the U.S. Sure, they've been a fixture in countries like Japan and China, but the idea that a U.S. deposit account would require a customer to actually pay them a fee to hold on to their money probably seems beyond the pale to a lot of people.
Unfortunately, negative interest rates, which they call "cost reversal" may be closer than you think, according to research from Market Rates Insight:
The announcement by the U.S. Federal Open Market Committee to keep the federal funds rate at a near zero level through mid-2013 supports our projection that the mounting amount of cash accumulating in U.S. bank deposits is eventually going to cause a cost reversal in interest on deposits because interest income from lending and interest expense from deposits are on a collision course. This means that loan rates are going to decrease even further to stimulate lending, and deposit balances are going to increase due to economic and market uncertainty.
The first case of cost reversal in U.S. banking industry was amounted in August by the BNY Mellon, which is charging an interest rate of 0.13 percent on deposits of $50 million and over. However, the underlying reasons for the need to charge a premium for deposits is evident also on the retail side of banking and it won’t be long before the threshold for "cost reversal" will go down to lower level of account balances.
This transformation is not by design and was not concocted in the boardroom of any bank; rather, it was created by market forces responding to economic circumstances.
The report goes on to outline some of those economic circumstances, including a massive flight to safety into deposit accounts occurring worldwide, very low returns on capital for banks, and a lack of viable alternatives for safety-conscious investors.
The key thing to note here is this prognosis only holds true if things continue as they are. As they say in the investing biz, "past performance is not a guarantee of future return." That holds both ways. Just because the economy is in the depths of a deep malaise now, doesn't mean it will stay there long enough to see banks advertising "zero percent CD accounts!" as if that were a good thing.
If you would have told me five years ago we'd have a real possibility of seeing negative deposit rates in this country, I would have called you crazy, but the economics don't lie. If you have a ton of people putting money into deposit accounts and nowhere for the banks to achieve adequate returns on those deposits sufficient to pay interest to investors, then the result is negative interest rates. It happened in Japan when it was in a liquidity trap, and it very well could happen here.
What do you think? Will we ever see negative CD rates in the U.S.?