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Near-zero short term interest rates may be lower down due to a planned change in deposit insurance fees for U.S. banks as stated by strategist Merrill Lynch of Bank of America at Barclays Place and the Royal Bank of Canada.

To broaden the base for deposit insurance fees to bank’s liabilities, the Federal Deposit Insurance Corp has proposed a plan that is designed to fund depositor protection while shifting the burden to larger lenders of cash loans such as cash advance loan, cash advance payday loan, payday cash advance and online payday loan. These lenders absolutely need cash and are reliance on riskier funding – may pose increase of threats to the financial system. The strategist added that these increased FDIC fees may cut into bank’s interest income which decreases money mark rates.

According to Wrightson ICAP LLC (New Jersey research unit of ICAP Plc), the effective rate may lower down by as much as 0.1 percentage point once the change has been implemented by the FDIC. This action would have similar effect as a cut in the interest rate the Federal Reserve pays banks in excess reserves and would drive repurchase agreement and Treasury bill rates lower as said by a money-market strategist, Joseph Abate.

Based on Brian Smedley, a strategist at Bank of America Merrill Lynch, a unit of Bank of America Corp, the FDIC change will add to catalyst for lower money-market rates that even potential money-market fund industry will make it hard to retain customer assets. This could lead to further consolidation of the industry.

A fall in overnight rates would at most be only about five basis points and would not be enough to speed any consolidation of the money-fund industry as said by the chief investment officer in Pittsburgh for taxable money markets at Federated Investors Inc, Deborah Cunningham.

The Nov, 9 FDIC proposal if adopted would be implemented by April 1. The central bank’s official target for overnight funds has been put on hold in a range of zero to 0.25 percent since December 2008.