Falling interest rates are hammering bank spread income, while yields elsewhere around the world are moving deeper into negative territory, and President Donald Trump has called on the Federal Reserve to cut below zero.
Bankers may not think negative rates are probable in the U.S. — Treasury yields lifted off a deep August swoon in early September — but they are holding internal discussions and planning for the scenario.
PNC Financial Services Group Inc. has "done a lot of work" simply to enable lending and deposit systems to operate at negative rates, Chairman, President and CEO William Demchak said at Barclays' recent Global Financial Services Conference. "It's a massive problem," he added.
Demchak predicted that negative rates would lead to increases in fees for customers and widespread branch closures across the industry as banks scramble to cut costs. "We would do the same," he said.
Regions Financial Corp. started evaluating negative-rate scenarios as a part of its stress testing process a couple of years ago, M. Deron Smithy, the bank's treasurer, said at the conference. "It's something we've spent more time thinking about lately."
Regions CEO John Turner said the bank has been exploring whether there are "additional hedging strategies that may seem well out of the money today" but that could be valuable in a negative-rate environment. Smithy said that efforts to lower deposit costs would hit a floor at zero while asset yields could slide into negative territory, and the bank's objective would be "to offset that exposure through the derivatives market."
"In terms of asset classes that may perform better in that environment versus others, I think it's still early," Smithy added. "We haven't formed any firm opinions there yet."
JPMorgan Chase & Co. Chairman and CEO Jamie Dimon also said banks could cut costs or charge account fees in a negative-rate environment. "It just seems very hard for me to charge consumers" a negative deposit yield, he added, speaking at the conference.
Dimon said he does not think negative rates are likely in the U.S. "We're thinking about how to be prepared for it just in the normal course of risk management," he said.
