Last week was a real rollercoaster for the fund management community. Following comments made by President of the European Commission, José Manuel Barroso, in which he said that falling confidence in the bonds of Italy and Spain reflected that the eurozone was no longer “just in the euro-area periphery”, European stock markets collapsed: the FTSE 100 Index closed at 5007 on 10 August having fallen 13 per cent since 1 August, wiping GBP200billion from the balance sheets of Britain’s leading companies.
Factor in continuing fears over the US economic recovery (despite labour figures coming in stronger than expected), and the end result has been systemic investor fear, the likes of which haven‘t been seen since ‘08. Risky assets were unceremoniously dumped last week as corporate treasuries and institutional asset managers dived into US treasuries: still a perceived safe haven, although given the recent downgrade by Standard & Poors one has to question the logic behind this.
The decision by the Fed to freeze interest rates for two years saw yields on two-year treasuries fall to just 17 basis points. Last week, one month T-bills dipped below zero.
One of the catalysts behind this was the decision last week by BNY Mellon to start charging its biggest clients with average deposits of over USD50million, and who had exceeded their average levels in June, as they looked to increase their cash holdings in deposit accounts.
Although only 0.13 per cent p.a., the fee nevertheless reflects the pressure custodial banks are under in these uncertain economic times: as depository levels rise, banks like BNY Mellon face higher deposit insurance fees with the FDIC (Federal Deposit Insurance Corp).
The fee is perhaps understandable when you consider that faced with such nominally low short-term yields in money markets, custodial banks have nowhere to make short-term profits. They’re being left with little choice, meaning the added cost of insuring their cash liabilities is, to an extent, being transferred to their clients.
It should be stressed that since last week, the surge in deposits has scaled back. As Gillian Tett wrote in the Financial Times recently, cash-laden investors seem to hold more faith in the safety of the US government than its banks, mainly because of the liquidity of T-bills.
When Hedgeweek asked BNY Mellon to comment on the charges, a spokesperson confirmed via email: “The vast majority of clients will not be affected by the proposed fee. The fee is intended only to be applied to a small number of institutional clients with extraordinarily high deposit levels where the deposits have increased significantly in recent weeks, well above market trends. Clients who maintain routine deposit levels will not be affected. As markets return to normal, we expect deposits will trend lower and the fee will no longer be necessary.”
Specifically, the fee affects clients whose monthly average balances after 8 August are more than 10 per cent above their average in June with the fee applying only to the portion of cash assets at least 10 per cent above the average.
One possible reason as to why BNY Mellon introduced this fee is because a lot of its clients are large corporations, which means it naturally attracts deposits: it’s currently the world’s largest custodial bank.
If other banks were to follow suit some market commentators think it would lead to increased rotation into money market mutual funds. Although State Street declined to be interviewed, they did confirm: “We haven’t changed our pricing practices relative to customer deposits.”
It’s unlikely that BNY Mellon’s decision will set an unwelcome precedent. This was a unique response to a unique situation. The fact that the surge in deposits has stabilised bears this out.
“I don’t think it sets a dangerous precedent. It’s a sign of the difficulty banks are having in making money. With the flat yield curve, those fees have to be passed on somewhere,” comments Pete Crane (pictured), founder of Massachusetts-based money market fund research firm Crane Data LLC.
What the recent deposit surge at BNY Mellon does do, in Crane’s opinion, is put the spotlight on the unlimited FDIC loophole. Regulators may well start asking how money market mutual funds, which are uninsured, are able to put deposits in and get them insured.
When asked his thoughts on why US treasuries remain attractive Crane says: “In the land of the blind the one-eyed man is king. Treasuries, no matter what the rating, are still the safest alternative. We’ve seen yields flash negative on a few occasions over the last three years. Now that the debt ceiling has been raised there’s likely to be more treasury issuance in the future. The US Treasury doesn’t want to upset budget hawks by issuing USD400billion in treasuries, but believe me it’s coming.”