By Juliet Chung and Vipal Monga
Several global banks have begun charging large customers to
deposit their money in euros, a rare move that could have costly
implications for investors and companies that do business on the
Continent.
The actions are driven by policies from the European Central
Bank, which in June became the largest central bank to impose a
negative interest rate on deposits--meaning banks are paying to
park their money with the ECB. The effort is designed to encourage
banks to instead use that money to lend. When the ECB dropped those
rates further in September, some banks started pushing those
costs--or costs related to the rate cuts--onto customers.
Now, instead of paying customers interest on their euro accounts
as they have done traditionally, some banks have started charging
them. Bank of New York Mellon Corp. recently started charging 0.2%
on euro deposits, the bank said Friday, and Goldman Sachs Group
Inc. and J.P. Morgan Chase & Co. have also started charging
clients, according to people familiar with the matter.
Meanwhile, Credit Suisse Group AG has told customers it will
pass along negative interest rates on all currencies in which they
apply, people familiar with the matter said, and has started
charging on euro deposits.
The reversal is the most sweeping of its kind that many bankers
and their clients say they can recall. The clients most immediately
affected are investment firms, such as hedge funds and mutual-fund
companies. Multinational corporations with sizable operations in
Europe could also face additional costs, according to people
familiar with the matter.
HSBC Holdings PLC will soon start charging customers with more
than roughly 10 million euros in deposits, according to a person
familiar with the matter. The move is intended to discourage a
flood of deposits from institutional investors fleeing competitors
that have already started levying charges on euro deposits, the
person said. An HSBC spokesman said Friday the bank was "monitoring
the situation."
Several bankers said the changing regulatory landscape has made
it harder to eat the cost, as they might have in the past. In 2011,
BNY Mellon disclosed a move to charge some of its U.S. depositors
for holding their cash, after investors poured money into the bank
to escape gyrations in the market. The bank later aborted the
plan.
A BNY Mellon spokesman said the 2011 situation "resolved itself"
as deposit levels shrank. "The current euro situation is much more
enduring and is likely to be the norm for some time," he said.
The latest move by the banks is notable because so many of them
are taking the same step, giving customers fewer options for moving
their money. Several people familiar with the matter said the fees
could vary depending on the client and the bank.
"As we go through this period of low-interest rates in the
Eurozone, our expectation is this is going to linger for a long
time," said Peter Yi, head of short duration fixed income at
Chicago-based trust bank Northern Trust Corp. "This isn't something
that's going to go away in the next year."
Mutual-fund firm Vanguard Group confirmed they are being charged
for their euro balances. "That is being passed on," said Vanguard
spokesman David Hoffman. "It's very recent."
He declined to say which banks are instituting the charge, or
detail the firm's euro cash exposure.
The new charges are setting off a search by some clients to try
to avoid or minimize fees. Investors and bankers say some are
moving their balances into cash-like instruments such as
money-market funds or repurchase agreements, also known as "repos,"
which are short-term loans backed by collateral. Other clients are
looking for banks where they can park cash without getting
charged.
The BNY Mellon spokesman said the bank was working with clients
who were looking for alternatives to cash deposits to find
investment opportunities.
In an interview on Friday, BNY Mellon Chief Financial Officer
Todd Gibbons said the firm expects the fees to be imposed across
the industry. He said 15% of BNY Mellon's deposits are
euro-dominated and that he expects most of the affected clients to
be "savers on the institutional side," including financial-services
firms, corporations and pension funds.
BNY Mellon began charging clients 0.2% on euro deposits starting
Oct. 1, according to a memo sent to clients. Mr. Gibbons also
discussed the charge on an earnings call Friday.
The charges highlight the divergent paths central banks in the
U.S. and Europe are taking. Although the Federal Reserve has kept
interest rates low for years, it continues to pay banks on excess
deposits and has signaled it hopes to raise rates relatively
soon.
The fees also underscore challenges institutional depositors
such as hedge funds, mutual funds and corporations may face going
forward in finding a welcome haven for their deposits. Banks are
forced to set aside more capital against deposits under new banking
rules yet have difficulty earning any return on that cash, making
such deposits unattractive.
Relationships between banks' prime brokerage businesses, which
execute and finance trades for clients, have already come under
pressure as banks have started squeezing their clients for more
profits.
In positive interest-rate environments, banks typically earn
interest on client cash and pass part of that return on to their
depositors. On euro deposits, banks can get paid the ECB's
overnight deposit rate; the rate on benchmarks like the Euro
Overnight Index Average, or Eonia, that trade and tend to trend
with the ECB's interest rates; or yield on other investments.
The ECB in early September lowered its rate deeper into negative
territory, to -0.2% from -0.1%. The Eonia went negative for the
first time in late August.
Not all big banks are following suit. Deutsche Bank AG had not
started levying charges on euro deposits as of Friday, according to
people familiar with the matter.
State Street Corp. said in a statement Friday it hadn't yet
started charging on euro deposits but that it had told clients it
might do so in the future. "Continued persistence or deterioration
of the current rate environment may require that we take action
consistent with prudent financial management," the statement
said.
Anthony Carfang at Treasury Strategies, a Chicago-based
consulting firm, said highly visible negative rates made such
charges more palatable than they may have been in the past. "This
looks like a pass-through," he said. "That makes it a lot more
acceptable in the customer's mind."
Max Colchester and Daniel Huang contributed to this article.
Write to Juliet Chung at juliet.chung@wsj.com and Vipal Monga at
vipal.monga@wsj.com