May 1st: Upside Down Day

JPMorgan recently sent a letter to large corporate customers (mostly other banks) explaining it will begin charging an annual rate of 1 percent beginning May 1 on any cash deposited in excess of the amount these businesses typically need to fund on-going operations.

Say what?

Yep, itʼs called a “balance sheet utilization fee.” CEO Jamie Dimon has taken this unprecedented step of removing the incentive for customers to deposit large amounts of unused capital in order to reduce his bankʼs liabilities and comply with mandated de-leveraging in an era of increased regulation. If this seems odd, just remember that deposits are counted as liabilities (money the bank owes), versus loans which are counted as assets (money owed the bank). Mr. Dimon is trying to reduce his liabilities, and targeted customers have withdrawn about $20B since February according to data complied by Bloomberg. Ultimately, Mr. Dimon expects withdrawals of $100B, about 0.75 percent of total JPM deposits.

Negative interest rates here at home were perhaps inevitable. With the European Central Bank purchasing roughly twice the amount of new monthly sovereign debt issuance in Europe, 55 percent of the EUʼs $5.3T sovereign bonds now trade at negative yields according to Bank of America. Even LIBOR has gone negative this week, meaning European banks must effectively pay one another a storage fee. This is not what we learned in Economics 101, but it is the new reality of ECB President Mario Draghiʼs pledge to “do whatever it takes” to reduce cash hoarding and spur risk taking.

JPMorganʼs customers will not likely withdraw their cash in order to to buy Europeʼs money-losing bonds, since they can accomplish the same task by staying at the bank. Instead, they (and the rest of us) have to find other assets which actually pay interest… namely U.S. Treasuries.


With the spread between U.S. and German 10-yr bonds at fifteen year highs, we would argue the U.S. bond at 1.96 percent actually look attractive, especially since four Federal Reserve bank presidents this week have reiterated their commitment to long-term accommodative policy.

Negative sovereign debt of highly indebted countries in Europe, and a negative deposit rate at one of the biggest banks at home. Upside down indeed.