Ed’s Daily Notes for November 25th   4 comments

Financial Times: US banks warn Fed interest cut could force them to charge depositors

Leading US banks have warned that they could start charging companies and consumers for deposits if the US Federal Reserve cuts the interest it pays on bank reserves.

Depositors already have to cope with near-zero interest rates, but paying just to leave money in the bank would be highly unusual and unwelcome for companies and households.

The warning by bank executives highlights the dangers of one strategy the Fed could use to offset an eventual “tapering” of the $85bn a month in asset purchases that have fuelled global financial markets for the last year.

Minutes of the Fed’s October meeting published last week showed it was heading towards a taper in the coming months – perhaps as soon as December – but wants to find a different way to add stimulus at the same time. “Most” officials thought a cut in the interest on bank reserves was an option worth considering.

Executives at two of the top five US banks said a cut in the 0.25 per cent rate of interest on the $2.4tn in reserves they hold at the Fed would lead them to pass on the cost to depositors.
Banks say they may have to charge because taking in deposits is not free: they have to pay premiums of a few basis points to a US government insurance programme.

“Right now you can at least break even from a revenue perspective,” said one executive, adding that a rate cut by the Fed “would turn it into negative revenue – banks would be disincentivised to take deposits and potentially charge for them”.

Other bankers said that a move to negative rates would not only trim margins but could backfire for banks and the system as a whole, as it would incentivise treasury managers to find higher-yielding, riskier assets.

U.S. banks could become very dangerous if the Fed follows through with this plan. I would avoid U.S banks for the near future, especially regional banks which are particularly vulnerable to this kind of Fed policy.

Klein Online: Israelis in secret trip to inspect Saudi bases. Could be used as staging ground for strikes against Iran

Israeli personnel in recent days were in Saudi Arabia to inspect bases that could be used as a staging ground to launch attacks against Iran, according to informed Egyptian intelligence officials.

The officials said Israel, Saudi Arabia, Qatar, Jordan and other Arab and Persian Gulf countries have been discussing the next steps toward possible strikes on Iran’s nuclear sites.

The officials said the U.S. passed strong messages to Israel and the Saudis that the Americans control radar capabilities over the skies near Iran and that no strike should be launched without permission from the Obama administration.

It was unclear whether the purported visit to Saudi Arabia by Israeli military and intelligence officials signals any real preparation for a strike or if the trip was meant to keep pressure on the West amid Israeli fears about the current deal with Tehran.

The trip came prior to the announcement today of the deal with Western powers that aims to halt key parts of Iran’s nuclear program in exchange for sanctions relief.

At a cabinet meeting in Jerusalem today, Prime Minister Benjamin Netanyahu slammed what he called a “bad” and “dangerous” deal, while affirming that Israel will not allow Iran to go nuclear.

Let’s assume for the sake of argument that this is accurate, and Israel carries off a strike against Iran. Iran may toss a few missiles at Israel, and then this will be done. Oil prices spike, then drop as soon as it’s over. Considering the Arabs are working with the Israelis on this, Iran can’t get too aggressive, without turning the entire Middle East against themselves. That’s a war they can’t win, even assuming the U.S. stays out of it (big IF!).

France 24: China creates air defence zone over Japan-controlled islands

Beijing on Saturday announced it was setting up an “air defence identification zone” over an area that includes islands controlled by Japan but claimed by China, in a move that could inflame the bitter territorial row.

Along with the creation of the zone in the East China Sea, the defence ministry released a set of aircraft identification rules that must be followed by all planes entering the area, under penalty of intervention by the military.

Aircraft are expected to provide their flight plan, clearly mark their nationality, and maintain two-way radio communication allowing them to “respond in a timely and accurate manner to the identification inquiries” from Chinese authorities.

Considering how much trouble China is going to with this, I tend to doubt this will cause anything more than a minor international incident, at worst. But it is certainly worth watching.

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Posted November 25, 2013 by edmcgon in Economy, Federal Reserve, Market Analysis, News, Politics

4 responses to “Ed’s Daily Notes for November 25th

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  1. http://www.nytimes.com/2013/11/23/us/politics/tension-and-woes-before-health-website-crash.html?smid=fb-share

    How not to run a large project. I have been on many government projects and the lack of an empowered decision maker from the “customer” is a death knell. Unfortunately it happens all to often. It is not an issue that is unique to the government or this particular administration, I participated in large projects at fortune 50 companies that failed to meet expectations for the same reason. Although nothing as spectacularly as healthcare.gov.

    I have also known a lot of people that worked for CGI and am not at all surprised that they would mislead the customer and shift blame. Given the way Obama runs his WF (ie no drama) I am also not surprised those having issues would fail to brief him on them. Incompetence all the way around.

    Robb

    • I remember reading some White House staffer saying, “Failure is not an option,” about the October 1st rollout. My first thought was, this isn’t Apollo 13! Nobody dies if the website doesn’t work. You can’t get people to accomplish the impossible by rolling out cliches that were created in times of great stress, where lives were on the line. The average programmer, even if he’s an Obama supporter, doesn’t care. If he tells you it can’t be done, and you press him to do it anyway, he’ll just give you the best crappy code he can write by the deadline. Better, faster, cheaper: Pick two…

      • I have actually participated in projects with congressional and/or WH cast in stone deadlines. I have found that those managing the project chose to deliver something that is broken rather than nothing at all. Typically you lose your job if you deliver nothing, you get in trouble if you deliver and it doesn’t work.

        Robb

  2. Thanks for the Banking article Ed, very disturbing. If I had to pay the bank just to keep my money there for their use I’d rather start stashing it under my mattress. Going off the grid is looking more and more attractive.

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