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Bank slaps fee on 'excess' deposits from big clients

August 4, 2011 |  6:58 pm

The rush to safety now is coming at an unusual cost, at least for big investors at one major U.S. bank.

Bank of New York Mellon said Thursday that it would begin charging institutional customers a fee if they place an “excess” amount of cash with the bank, above certain thresholds.

Some investors have poured money into banks in the last few weeks, first as a precaution against a possible U.S. Treasury debt default and more recently as global stock markets have plummeted.

Even if banks pay no interest on some short-term deposits they face the cost of federal deposit insurance premiums on the money.

Meanwhile, they may not be able to invest the money profitably, with short-term Treasury bill yields again plunging toward zero in recent days.

Money market mutual funds saw a near-record net cash outflow of $103.2 billion in the seven days ended Tuesday, nearly all of it pulled by institutional investors, according to iMoneyNet Inc. Much of that money is believed to have gone to banks.

Pete Crane, head of money-fund research firm Crane Data, said the outflow stemmed from investors’ concerns that some money funds might have faced losses on Treasury securities if Congress hadn’t raised the federal debt ceiling, allowing the Treasury to borrow freely again.

As cash left the money funds, “Banks no doubt were the main beneficiaries,” Crane said. Because banks can offer unlimited federal deposit insurance on non-interest-paying business accounts, institutional investors could easily park cash in those accounts with no risk of principal loss.

But the move by Bank of New York Mellon suggests that an old line rings true: There really is no free lunch.

-- Tom Petruno