U.S. banks have long looked with pity at overseas lenders coping with negative interest rates. Now, they’re grappling with the fear they may join the crowd.

Negative rates -- especially if they persist for many years -- reduce the spread banks make between lending and borrowing because they cannot pass the negative rate onto most depositors. Coupled with surging defaults due to an economic downturn, they can sap profits out of the banking system even if they create an initial jump in lending. That toxic combination has crippled Europe’s banks in the last six years, a dreaded position their U.S. peers would like to avoid.

“Initially, there’s a sugar rush when negative rates are introduced,” said Alberto Gallo, head of macro strategies at London-based hedge fund Algebris Investments. “But ultimately, over time, you zombify the banks by lowering the velocity of money. Negative rates are a bad idea.”

Surging provisions for bad loans have already eaten into U.S. bank profits, with the top six firms seeing their first-quarter income decline by about 60%.

A quarter-point cut to zero for the upper bound of the Fed’s main policy rate could lower annual income by about $1 billion to $2 billion for each of the biggest banks, according to their latest quarterly filings. Further cuts below zero would add additional costs: paying the Federal Reserve for the $3 trillion excess reserves held at the central bank. At a hypothetical -1%, that would mean an annual charge of $30 billion for U.S. lenders, and roughly $10 billion of that would fall on the six biggest firms.

Fed policy makers have pushed back on traders who are pricing in the chance that they utilize a negative-rate policy. Earlier this month implied rates on Fed-funds futures showed traders saw likely odds of the central bank cutting rates below zero in January. Prices have stabilized since with futures no longer pricing in a negative Fed rate, yet options traders continue to purchase contracts that hedge against risk of that happening.

“Debt traders and the stock market overall are still pricing in the idea of negative rates being part of the arsenal of what the Fed may do,” said Patrick Leary, chief market strategist and former trader at independent broker-dealer Incapital. “My mantra on the Fed, particularly this Fed, is don’t look at what they say. Look at what they do -- and look at what the market tells them to do.”

Bank executives constantly decry negative rates, arguing that the benefits to the economy are elusive while the harm to the banking system is significant. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has talked about “huge adverse consequences” of negative rates. European banks, which have suffered on their home turf with below-zero rates since 2014, have warned U.S. policy makers not to follow suit.

“Please don’t do this,” said Christiana Riley, head of Deutsche Bank AG’s U.S. operations, at a conference in October. “It defies all logic.”

Still, President Donald Trump has consistently pressured the Fed to go negative, recently calling it a “gift” to the U.S. economy that should be accepted.

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