Negative interest rates don't present the same magnitude of threat to all banks. Image source: iStock/Thinkstock.
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If the Federal Reserve takes the unprecedented step of imposing negative interest rates, there's reason to believe that U.S. Bancorp will fare better than most of its peers. This is because a smaller share of U.S. Bancorp's liabilities consist of deposits held by the central bank.
Data source: FDIC's Statistics on Depository Institutions.
The concept of negative interest rates is counterintuitive. To be clear, it doesn't mean that your bank will soon start paying you and me interest on our mortgages -- if we could only be so lucky!. The primary impact will be felt instead by banks that have money on deposit at the Fed.
The nation's banks currently have $2.3 trillion worth of excess reserves deposited at the central bank. These are above the minimum threshold that they're required to keep on hand to satisfy customers' withdrawal requests. One reason they have so much on reserve is because the Federal Reserve currently pays an interest rate of 0.50% on the funds.
Data source: Federal Reserve Bank of St. Louis.
This presents an arbitrage opportunity for banks. People like you and I deposit money at a bank and earn 0.03% in interest. Meanwhile, the bank can take that money and earn 0.50% on it. On $10 billion worth of deposits, that equates to a $47 million profit. It's not a lot on a percentage basis, but the profits are risk-free.
Negative interest rates would eliminate this. By implementing them, the Fed would not only stop paying banks to keep money on reserve, it would actually start to charge them for doing so.
This could add up to a significant chunk of change for the nation's biggest banks. Take JPMorgan Chase as an example. It currently has $337 billion on deposit at the Fed, according to the FDIC's Statistics on Depository Institutions. If the interest rate on those swung from a positive 0.50% (i.e., where they are today) to a negative 0.25%, that would equate to a $2.5 billion decline in its annual pre-tax profits.
It's for this reason that U.S. Bancorp would be less affected by negative interest rates than many of its counterparts. It had $4.6 billion on deposit at the Fed as of the end of the third quarter of 2015, which is the latest data made available by the FDIC. That equates to only 1.23% of its total liabilities. This is the second smallest percentage among regional banks in its peer group.
Data source: FDIC Statistics on Depository Institutions.
Thus, even in the unlikely event that the Fed decides to implement negative interest rates, it's reasonable to argue that the move would only serve to bolster U.S. Bancorp's competitive position relative to its competitors. It's a textbook example of the maxim that losing less is sometimes winning big.
The article U.S. Bancorp and Negative Interest Rates: Sometimes Losing Less Is Winning Big originally appeared on Fool.com.
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