Banks in Japan and Europe are fed up with central bank negative interest rate policies that cost the banks money.
Commercial banks and their customers alike seek ways to avoid central bank lunacy.
In Germany, banks are considering holding deposits in cash rather that parking funds at the ECB.
The Financial Times reports Negative Rates Stir Bank Mutiny.
Lenders in Europe and Japan are rebelling against their central banks’ negative interest rate policies, with one big German group going so far as to weigh storing excess deposits in vaults.
The move by Commerzbank to consider stashing cash in costly deposit boxes instead of keeping it with the European Central Bank came at the same time as Tokyo’s biggest financial group warned it was poised to quit the 22-member club of primary dealers for Japanese sovereign debt.
The ECB and the Bank of Japan have for months imposed negative rates for holding bank deposits in an attempt to push lenders to deploy their cash in the real economy through more aggressive lending to businesses. The policy in effect taxes banks for storing excess liquidity.
The central bank policies have hit bank profitability in both regions and German banks have been vocal in criticising Mario Draghi, ECB president, accusing him of punishing savers and undermining their business models. The policy cost German banks €248m last year, according to the Bundesbank.
Japanese banks have been more muted but Bank of Tokyo Mitsubishi UFJ has become the first leading lender to break ranks, confirming it is considering giving up its primary dealership status for sales of Japanese government bonds.
Negative rates have hammered share prices. Japan’s Topix bank index is down 28 per cent this year and the Euro Stoxx Banks index is 21 per cent lower.
Commerzbank said it was not yet storing cash in vaults and added that “we have not decided to do so”. However, two people briefed on the bank’s thinking said the lender had been considering such a step.
The bank is not alone. Some savings banks in Bavaria have also explored storing physical cash and Nikolaus von Bomhard, chief executive of Munich Re, said this year that the reinsurer would experiment with holding at least €10m of its reserves in cash to see whether or not it was practical.
Staggering Idiocy
Central banks themselves created this madness by buying assets. It is a mathematical certainty that excess reserves are a direct function of central bank balance sheets.
The idea that low interest rates encourage banks to lend is pure idiocy. It is impossible to lend excess reserves except to another bank that needs them.
If a bank makes a normal loan, it is 100% certain the amount of the loan will get redeposited elsewhere, effectively transferring “excess reserves” elsewhere.
Banks don’t need to borrow reserves because they are awash in reserves (with the exception of troubled banks that no other bank would lend to anyway).
Finally, lowering banks profits and bank share prices is hardly a way to get banks to lend.
In Japan, threat of negative rates caused a run on safes. For details, please see Safes Sold Out in Japan: Customers Hoard Cash in Response to Negative Rates.
Mike “Mish” Shedlock
Added incentive to eliminate all those big currency notes.
Large denomination currency notes have nothing to do with interest rates paid by central banks to member banks and there is plenty of vault space at banks all around the world to store as much as they want or need in the way of cash denominations of $100 or less. However, the big issue is that there simply is NOT VERY MUCH ACTUAL CURRENCY IN CIRCULATION anywhere in the world that banks can even obtain to store.
The total M1 money supply in the US is only $3 trillion and only $1.3 trillion of that is printed currency. This is confirmed by the Federal Reserve H.3 report:
http://www.federalreserve.gov/releases/h3/current/
M2 which includes M1 plus savings balances is only around $13. None of the QE funds increased the money supply at all but only served to increase the MONETARY BASE with 100% of those funds remaining inside the Federal Reserve.
That LITTLE BIT OF MONEY supports the largest economy in the world which is now an $18 trillion a year economy.
Not a penny of the debt in the US was run up by the Federal Reserve at all.
Or they could buy gold
Yes. But gold carries risk, prices can go up or down. whereas with cash you know what you have got. With deflation, it is likely to be worth more down the line.
Not exactly. Currencies fluctuate in price, too. There is risk in holding currency. I can’t see buying gold as being bad for banks, and maybe that is the unstated purpose of negative interest rates in Germany and Japan –to induce banks to buy gold when they can’t find any other use for the excess QE cash.
Perhaps all this loan making talk is just a cover story, as it really makes no sense. If the central banks came out and said publicly to buy gold, it would be taken as meaning that they know something bad about the currency, that it is a crock. So, NIRP and ZIRP could be a disguised way of forcing banks into gold when they find that holding too much cash incurs excessive storage costs. In other words, perhaps gold is the end game behind ZIRP and NIRP.
The biggest issue with Gold versus currency for operating capital, is almost all costs and liability are denominated in currency. So even if currency “goes down in value”, so does most costs and liabilities. While with Gold, you may well be caught upside down.
For banks in particular, another disinducement to own Gold, is that most of the events that historically has been “good for gold”, are also “good” for equities and particularly real estate. With the latter being much more straight forward for a bank to gain leveraged exposure to, than Gold.
Even for individuals, there are precious few periods where holding gold have outperformed levering up on real estate. But for them, Gold still serves as a bulwark, against the entire financialization model that underpins real estate, unraveling. Which will happen, as it’s fundamentally sustainable, but noone knows when, and hedging against it, is hardly part of banks’ business models.
Why would any bank want to speculate in such a WILDLY VOLATILE LITTLE NICHE FUNGIBLE COMMODITY such as gold which has had HUGE PRICE SWINGS all based on MANIC SPECULATION. Gold is presently down nearly $7000 per ounce since April 2011 when its manic speculative price peaked at $1,927 per ounce and it is now about $1,264 an ounce and was recently as low as $1,050 per ounce and is headed to well below $1,000 per ounce.
US Dollar Strength could send gold tumbling below $1,000 again, Citi says
http://www.marketwatch.com/story/this-one-thing-could-send-gold-tumbling-below-1000-again-citi-2016-05-23
LOL Riiiight Adam: The only real money is gold.
Cash is just currency. While there are advantages to cash in halcyon times I don’t get the feeling of Sunshine On My Shoulder and I am not getting a Rocky Mountain High.
Are you?
Gold is a decent way to go for the banks with negative interest rates. The chance of gold below 850 is pretty low given production costs.
Dude, you are fighting 5000 years of history here with your little anti-gold rants. I am long gold. I think you should short gold and let’s see who comes out on top.
During the credit expansion phase of a Minsky cycle bank capital ratios improve as bank profits explode. It’s a true run away instability. Banks create new credit money that chases asset prices upward yielding retained bank earnings improving bank capital ratios.
Of course all this runs in reverse too. Once the credit overhang leads to credit implosion banks become capital impaired. This is why we have ZIRP and even NIRP. CBs cannot allow a debt default cascade to get started. Better unhappy banks than wiped out banks and a debt deflation run away death spiral.
Banks NEVER CREATED A SINGLE PENNY OF MONEY contrary to your assertions, but MERELY LOAN CUSTOMER DEPOSIT FUNDS to borrowers. Yes, that does create a certain “money multiplier” effect, but is not in any way a creation of any new money at all.
The only “ZIRP” applies to the Federal Funds Rate which is strictly for INTERBANK BORROWING for 1) very short term (typically overnight) terms, and then 2) strictly for LIQUIDITY PURPOSES to clear interbank transactional imbalances, and then 3) on a fully collateralized basis. Other than that, there is no such thing as “ZIRP” at all, so obviously it has nothing whatsoever to do with any “price discovery” at all.
There was no ZIRP available to anyone from the Federal Reserve and that only affected the Federal Funds Rate at which which BANKS CAN BORROW from each other and then STRICTLY FOR LIQUIDITY PURPOSES on a very short term (typically overnight) fully collateralized basis. 100% of the Federal Reserve QE funds have always remained inside the Federal Reserve and never had anything whatsoever to do with the US economy or markets in any way, shape, or form.
The Federal Reserve versions of QE entirely ended on October 31, 2014 and there will be no further QE at all. Any TOMO or POMO purchases of US Treasuries by the Federal Reserve are NOT QE at all and have absolutely nothing whatsoever to do with GDP.
You and Krugman can start a club. Call it the loanable funds nonsense club. In your world banks say,”gee, I’d lend you some money but I have to wait till someone deposits some.”
Here in the real world banks simply lend especially against what everyone believes are ever rising assets as collateral and if they are not capital impaired. If they need reserves they borrow them from other banks or worst case at the Fed discount window. They post a liability by crediting funds to a demand account in your name thus “funding ” the loan and they post an asset being your signed loan document. The bank balance sheet expands. The bank capital ratio deteriorates.
In aggregate this credit creation drives asset prices higher. Banks profit. The retained earnings restore bank capital ratios. The music plays.
Eventually private debt reaches about 170% of GDP. Oops. Asset prices stop rising. Debtors default. Banks fail. This is the end of a Minsky credit cycle.
Banks will have to make up for the negative interest rates on their excess reserves by: 1) raising their fees, and 2) raising interest rates on loans to customers. So, negative interest rates on bank reserves by raising loan interest rates and banking fees should depress the demand for loans and banking services. Kind of a negative multiplier effect on banks. Is that in the central bank models behind negative interest rates?
apparently so
Interesting and pretty much correct take on the ZIRP/NIRP matter!
But there are limits to which banks can raise customer fees and interest on loans they make as there are many competitor banks who will continue to offer lower fees and interest. In the US alone, there are about 7,000 banks.
Europe is a lovely place which will be like German bliss .
My thought is that negative rates both in Europe and Japan are quid pro quo support for the dollar. The US Federal reserve supported the these banks during QE. How long will erope and Japan tolerate this nonsense,
The Federal Reserve did not in any way, shape, or form “support” any foreign banks at any point in time, and QE had nothing whatsoever to do with any banks outside of MEMBER BANKS OF THE FEDERAL RESERVE as to their US operations and strictly involved the purchase of existing securities in the form of US Treasuries and MBS instruments from those member banks in exchange for depositing the proceeds of those transactions in the excess reserves accounts of those member banks inside the Federal Reserve with no QE funds ever actually leaving the inside of the Federal Reserve.
Adam: Perhaps you missed the findings of the fed Audit, where it was discovered that from 2007 to 2010 the Fed lent trillions of dollars to foreign banks.
Link : https://www.sott.net/article/250592-Audit-of-the-Federal-Reserve-Reveals-16-Trillion-in-Secret-Bailouts
Adam you seriously need to do some research. The Fed did bailout foreign banks and 125 corporations. Bloomberg exposed this with an FOIA request that went to the supreme court. You can goggle it if you like.
“The Federal Reserve did not in any way, shape, or form “support” any foreign banks at any point in time,”
Wrong
1) Federal Reserve conducted currency swaps during the crisis. These swaps were with other central banks who then used the $US to bail out their banks.
http://www.federalreserve.gov/monetarypolicy/bst_liquidityswaps.htm
2) Discount Window open to foreign banks during the crisis. See Table 4 footnote 3
http://www.federalreserve.gov/monetarypolicy/clbs_lending_facilities_200910.htm
Do you ever get tired of ceaselessly apologizing for your employers, the fed? And why did you give up the socalbeachdude moniker? Was it because it had lost all credibility?
We already have effectively negative rates given my savings accounts are drawing .2% interest while my mortgage is still at 4.5%. They even offered to lower my rate to 3% on my mortgage if I would pledge equal savings against it. I felt so blessed.I would be happy to make 2.5% on zero risk myself, yet bankers still can’t make a living at it…even when its not even their money.
So, the banks, having been bailed out by “stimulus,” and artificially low interest rates, are now upset that they have to pay interest on the free money they received? Isn’t paying interest on reserves supposed to “sterilize” the freshly printed paper, so as not to cause “too much” inflation, and thereby only slowly boiling J6P, instead of broiling him? F*ck the banks, and their central bank cronies. They want pure profit on the freshly printed paper, and don’t give one single f*ck about anyone outside of their inner circle. Go long guns, ammo, and rope.
No US banks were “bailed out by any stimulus” and no banks in the US ever received any “free money” from anyone.
Are you somehow not aware that the money involved with the Federal Reserve QE programs was used to PURCHASE EXISTING SECURITIES from member banks and that there was NO NET GAIN WHATSOEVER TO THOSE BANKS from those QE transactions involving the Federal Reserve?
You’re revisionist history is astounding! Is your world also filled with unicorns and gumdrops?
Banks were bailed out, and, for all intents and purposes it was free moneys for them:
https://en.m.wikipedia.org/wiki/Emergency_Economic_Stabilization_Act_of_2008
QE wasn’t until later. However, it the story is essentially the same. Fed prints money, gives it to the banks, banks make money off the free money they’re given by charging their customers higher rates. Whatever paper shuffle theFED and the banks pretend to do is window dressing.
You’re a liar, and not a very good one at that.
“Staggering Idiocy”
In spades.
Huh? What “idiocy” are you talking about?
Banks all around the world – including here in the US – are DEMANDING THAT CENTRAL BANKS RAISE INTEREST RATES PAID ON RESERVES AND / OR EXCESS RESERVES DEPOSITED IN CENTRAL BANKS.
One of the ONLY THREE interest rates set by the Federal Reserve is IOER.
The IOER (Interest On Excess Reserves) interest rate does have an immediate beneficial impact for banks as it is the interest paid to banks on their excess reserves accounts inside the Federal Reserve and those accounts now have more than $2.5+ trillion sitting in them, and banks were very fortunate to see the interest they received on those DOUBLE on December 16, 2016 from 0.25% to 0.50% and are urging the Federal Reserve to get that increased again by at least 0.25% to 0.50% without any further dawdling or delay as banks need increased income to help profitability this year.
“Banks all around the world – including here in the US – are DEMANDING THAT CENTRAL BANKS RAISE INTEREST RATES PAID ON RESERVES AND / OR EXCESS RESERVES DEPOSITED IN CENTRAL BANKS.”
Maybe depositors should demand the same, for their reserves, held in savings accounts.
The upcoming Federal Reserve FOMC meetings at which the FOMC can decide to raise the only 3 interest rates they set are as follows:
June 14-15, 2016
July 26-27, 2016
September 20-21, 2016
November 1-2, 2016
December 13-14, 2016
https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
With at least 2 interest rate increases targeting this year by the Federal Reserve there will be increases at 2 of those 5 meetings and 4 of those 5 meetings are prior to the November 2016 US election.
You don’t half go on, give it a rest.
If we go to a digital economy and cash ceases to exist watch the price of gold and Real estate escalate. People like to own something they can see and touch even if it is just paper money or coins. Also watch the barter system begin to grow.
“Banks in Japan and Europe are fed up with central bank negative interest rate policies that cost the banks money.”
It isn’t just banks. Zero Hedge reports that in Japan, “The Democratic Party wants to call for the withdrawal of negative interest rates. Negative interest rates shift the burden onto savers. They cause unease among smaller companies because they make financial institutions unwilling to loan, or prompt them to call loans in early.” Yamao said.
Maybe negative rates are there to equalize the interbank market, force interbank lending. That would be a way prop up the system and force the most use out of reserves. This comes in a time of introduction of new legislation and resolution authority in EU, so would push banks into combined liabilities, meaning one voice when it comes to ECB policy due to risk therefor becoming systemic.
It is funny how post gfc, much debt returned to within national borders. Now the ECB is acting as centralizer with its purchases, that would be something of joint liability, maybe negative rates are there to encourage more of that.
Silly bankers
Don’t they know the trivial, ceteris paribus riddled spreadsheet model of the economy proves NIRP works?
Transfer payments themselves are being denied by Governments (“bail ins.)
This sounds very much like the 3rd Reich’s “Hunger Plan” but on a global scale.
The Banks are irrelevant as the State itself takes over the responsibility of violent suppression of dissent.
Still…Russia is a large land mass. Not sure the childless West has it in itself to launch the formalized invasion it keeps claiming it so badly wants to do.
They are the “undermenschen” after all so I’m sure after the “progressive West” has figured out how to destroy their own countries for entertainment purposes they’ll figure it out for the “sub humans” too.
The photo of you is inappropriate. What the hell are you laughing about?