Alternative Bank Schweiz (ABS), a small bank in
Switzerland broke the negative interest rate on deposits barrier. This is
Money reports CHARGING customers to cake their money,
(emphasis in caps theirs). The Alternative Bank Schweiz wrote to customers
telling them they would face a -0.125 per cent rate on their money from 2016
– and a -0.75 per cent rate on deposits above 100,000 Swiss francs. The move
echoes the Swiss central bank’s -0.75 per cent negative deposit rate imposed
on financial institutions placing money with it. Sweden’s central bank also
introduced negative rates, which currently stand at -0.35 per cent, while the
European Central Bank introduced them in part with its -0.2 per cent
overnight deposit rate. The Bank of England’s chief economist Andy Haldane
delivered a speech in September discussing how Britain could have to consider
negative interest rates as an extreme measure in a future crisis. The big
Swiss banks passed on some of the pain from the Swiss central bank’s -0.75
per cent rate to their institutional clients, but Alternative Bank Schweiz is
believed to be the first retail bank to hit savers with a charge. The bank
describes itself as an ethical organisation focused on backing firms
investing in social and environmental projects.
With its balance sheet totalling nearly 1.6 billion Swiss
francs last year, most of its activities are concentrated in cooperative
housing projects, providing affordable housing and sustainable energy
solutions, as well as organic farming. Less Than Zero Bloomberg offers
a "quick take" on Less Than Zero. Imagine a bank that
pays negative interest. Depositors are actually charged to keep their money
in an account. Crazy as it sounds, several of Europe’s central banks have cut
key interest rates below zero and kept them there for more than a year.
For some, it’s a bid to reinvigorate an economy with other options exhausted.
Others want to push foreigners to move their money somewhere else. Either
way, it’s an unorthodox choice that has distorted financial markets and
triggered warnings that the strategy could backfire. If negative interest
rates work, however, they may mark the start of a new era for the world’s
central banks. however, they may mark the start of a new era for the world’s
central banks. The Situation With the fallout limited so far, policy makers
are more willing to accept sub-zero rates.
Having once said that the European Central Bank had hit
the “lower bound,” President Mario Draghi signaled in October and November
that the deposit rate could be cut even further into negative territory. The
ECB became the first major central bank to venture below zero in June 2014,
and it now charges banks 0.2 percent to hold their cash overnight. Sweden
also has negative rates, Denmark used them to protect its currency’s peg to
the euro and Switzerland moved its deposit rate below zero for the first time
since the 1970s. That means investors holding to maturity won’t get all their
money back. Banks have been reluctant to pass on negative rates for fear of
losing customers, though Julius Baer began to charge large depositors.
The Background Negative
interest rates are a sign of desperation, a signal that traditional policy
options have proved ineffective and new limits need to be explored. They
punish banks that hoard cash instead of extending loans to businesses or to
weaker lenders. Rates below zero have never been used before in an economy as
large as the euro area. While it’s still too early to tell if they will work,
Draghi pledged during the height of Europe’s debt crisis in 2012 to do
“whatever it takes” to save the area’s common currency, signaling the ECB’s
willingness to be innovative. It chose to experiment with negative rates
before turning to a bond-buying program like those used in the U.S. and
Japan.
The Argument In theory,
interest rates below zero should reduce borrowing costs for companies and
households, driving demand for loans. In practice, there’s a risk that the
policy might do more harm than good. If banks make more customers pay to hold
their money, cash may go under the mattress instead. Janet Yellen, the U.S.
Federal Reserve chair, said at her confirmation hearing in November 2013 that
even a deposit rate that’s positive but close to zero could disrupt the money
markets that help fund financial institutions. Two years later, she said that
a change in economic circumstances could put negative rates “on the table” in
the U.S., and Bank of England Governor Mark Carney said he could now cut the
benchmark rate below the current 0.5 percent if necessary. Economic
Distortions That's actually a balanced synopsis by Bloomberg as far as it
went. But unlike Europe, the US has large money market funds that would be
destroyed by negative rates. Banks may be able to hold out for a while by
raising other fees, but money market funds would immediately be in trouble.
Customers would withdraw money, put it into banks charging the lowest fees,
stuff cash under the mattress, or open safe deposit boxes. Those on fixed
income would be hurt the most. If customers withdrew cash, and I think they
would if rates got negative enough, there would be a run on the banks, but as
noted above the run on money market funds would likely happen first. Someone
Has to Hold the Cash Also note the absurdity of the central bank thesis.
They want people to spend the money. The absurdity is someone must hold every
dollar printed at all times.
Buy a candy bar and eat it, or a coat and wear it, the
store that sold those items has the money. Mathematically, someone at all
times must hold the money.
