For Banks, Cash Was King

So it’s come to this. Whereas once the mantra of lenders and investors had been “Cash is king,” now, at least from the banks’ point of view, it’s “Cash? We don’t need your stinkin’ cash.”

The Wall Street Journal reported this weekend that in the United States, banks are “going to new lengths to ward off” big cash deposits. Note the language: ward off. As in garlic to a vampire or chicken soup to the flu.

Banks need money to lend, which in turn allows for interest to be charged. Now it seems they don’t want cash on the books. And the way they may keep themselves, for lack of a better term, cash-asset-lite — at least through an example set by State Street Corp. and also handed down from JPMorgan — is to penalize institutional investors.

State Street is charging customers fees for keeping large dollar deposits with those lenders, while The Journal reports that JPMorgan has shrunk its deposits by $150 billion, just by levying fees. The impetus has two parts.

On the one hand, cash kind of just sits there, and the low interest rate environment has been earning too little for banks on what they do lend out (which of course has some risk) versus what they must pay depositors when the vaults are full. On the other hand, regulations put in place since the financial crisis a few years ago have proved tough too.

So as for the fees: they come on what the WSJ termed “hot money deposits” that would likely disappear in tough times – and banks have been told by the Federal Reserve to hold relatively high quality assets that would cover deposits that would suddenly be withdrawn if holders got skittish. The rules here are pretty onerous: banks must hold reserves of 40 percent against some corporate deposits, The Journal notes, and 100 percent against hedge funds, those notoriously fickle (and in many cases, notoriously underperforming) investment vehicles.

That’s a catch 22 for some investment professionals, such as those working at hedge funds or mutual funds, because the macro outlook, if not dour, is sour.

Interest rates are low by any historical standards, economic growth is slowing, and even China has been hobbled by muted (for China) growth. Against that background, investment pros have been boosting their cash reserves with counterparty banks, partly because they need to maintain some liquidity, per the Securities and Exchange Commission.

The numbers are sobering, as those put forth by the Federal Deposit Insurance Corp. show U.S. bank domestic deposits are up to more than $10.5 trillion, a 38 percent gain from five years ago. Loans outstanding, measured as a share of total deposits, are down 7 percentage points over the same period to 71 percent. A mismatch on that level signals that banks are having, and will continue to have, a tough time generating returns for investors – hence the move to kick cash to the curb, or at least charge fees on cash that is just being custodied for clients who just aren’t in any rush to move money around.

Expect the drumbeat to get a bit louder from the banks. The Journal noted that some institutions, such as BNY Mellon, and Northern Trust haven’t been charging fees on client cash – yet. Bank of New York is keeping its options open and its powder dry in this low yield landscape. Northern Trust, The Journal says, has been taking a “transaction by transaction” approach to accepting really large deposits – and that doesn’t even take into account possible fees to be charged, somewhere, sometime, maybe.

All in all it spells out a rough winter ahead for institutional bank clients and the cash that they love. The edict from on high is now – at least when it comes to dollars (albeit lots and lots of them) and deposits – “keep it movin’.”