THE BLOG

Modern Banking

05/05/2015 08:49 am ET | Updated May 05, 2016

Introducing The Balance Sheet Utilization Fee - by Jerry Jasinowski

For all of my life -- and we're talking quite a few years here -- there has been a premium for saving. We called it the miracle of compound interest. You put your money in the bank and leave it there. Just let the interest accrue year after year, maybe add a bit to it from time to time, and watch it grow into a substantive amount.

In recent years, we have seen that source of income virtually dry up as banks pay miniscule interest on savings. With the Federal Reserve -- through its quantitative easing policy -- basically giving money away, banks cannot afford to pay significant interest on savings.

I have always assumed, and I would guess we all have, that eventually this unfamiliar situation would rectify itself and once again there would be a significant payoff for saving. It never occurred to me that it would go the other way into negative interest -- that is to say we would reach the point we would have to pay the banks to keep our money.

But that point is coming. JP Morgan Chase has implemented what it calls a "balance sheet utilization fee," by which it means you have to pay the bank to keep your money. Call it a negative interest rate. Chase is aiming mainly at other financial institutions which are busily withdrawing their money from Chase, which is fine with Chase. The problem today is too much money out there chasing too few productive uses. Chase has more money than it knows what to do with.

Negative interest rates are already the rage in Europe. The European Central Bank, in its desperation to spur investment, has a deposit rate of -0.2 percent. The Swiss National Bank has a deposit rate of -0.75 percent. As of April 17, bonds comprising 31 percent of the value of the Bloomberg Eurozone Sovereign Bond Index ($1.93 trillion) are trading with negative yields.

This trend suggests it is only a matter of time until your bank notifies you that you will have to pay a fee for the bank to keep your money. If you don't like that, you can withdraw your money and -- what? Hide it under your mattress perhaps? Bury it in the back yard? Will you buy a gun and stay home all day guarding your money? There are reasons we have banks and providing security for our money is one of them.

The more obvious alternative would be to invest the money which would be an added inducement for savers to put their savings in the stock market pushing the Dow ever higher, or maybe even invest in a personal business venture or new product development. This presumably would give the economy a boost and help create jobs. That doesn't sound like a bad idea but it really is hard for ordinary people to find safe, promising investments. That's why they put it in banks in the first place.

The fact is that saving is also a great concept and the very idea of having to pay a penalty for saving troubles me because I was taught that savings was good for investment, economic growth, and improving your standard of living. Negative interest rates hurts the average saver and it would appear that continuing that uncertainty about what to do with rates is hurting macroeconomic investment and growth. We get a double negative whammy from the Fed's current zero interest rate policies.

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements. May 2015

More:

Banking