December 04, 2015
Neil Irwin had a piece in the Upshot section of the NYT raising the possibility that the Fed could have negative interest rates on reserves, rather than its current near zero rate, as a way to provide an additional boost to the economy. The argument is that it is very inconvenient to carry cash, so deposits would not flee banks even if the interest rate were a small negative number.
The problem is that this analysis does not consider the realities of the banked population. Banks have millions (tens of millions?) of customers with relatively low balances. These customers are marginally profitable to the banks. (Often the banks profit on fees from these people, like overdraft charges.)
If banks had to pay interest on reserves then these accounts would be even less desirable for banks, since they now would have to pay interest on the reserves that the small account holders had brought to their bank. For this reason, they may opt to raise their fees for opening and maintaining a bank account. The result would be that more people would be getting by without bank accounts.
Any serious discussion of negative interest rates has to deal with this problem.
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