Negative Interest Rate Mutiny in Germany, Japan
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.
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