Yves here. Consumers aren’t the only ones who find it rational to hang on to cash in deflation.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street
The Association of Bavarian Savings Banks, which represents 71 savings banks in the German State of Bavaria, has had it with the ECB’s negative deposit-rate absurdity, and it’s now instigating a palace revolt.
In 2014, when negative interest rates first hit Eurozone banks and ricocheted out from there, Germans called it “punishment interest” (Strafzinsen) because these rates were designed to flog banks and savers until their mood improves. But inexplicably, their mood hasn’t improved.
Bank stocks have gotten clobbered as their profits have gotten hit by the negative interest rate environment. Stocks of Eurozone companies in general have come down hard, and the Eurozone economy simply hasn’t responded very well though the ECB is flogging it on a daily basis with its punishment interest.
And so Bavarian savings banks have had enough. The Frankfurter Algemeine has obtained a memo by the Association of Bavarian Savings Banks that openly encourages its member banks to stash cash in their own vaults rather than depositing it at the ECB and paying the penalty interest of 0.3% to the ECB on these deposits.
“The savings banks therefore are asking if it might be more economical for them to keep high cash values in their safes and not - as usual – store them at the ECB,” the memo said.
To estimate total costs and determine which would be the better deal – hang on to the cash or send it to the ECB – the association analyzed the costs of additional insurance coverage needed for these higher levels of cash-in-vault and further discussed some options concerning this insurance coverage, or as it says, for “ECB-cash protection.”
According to its analysis, insurance coverage on cash costs 0.15%, plus insurance tax, in total 0.1785%. This is below the ECB’s punishment rate of 0.3%. Each additional €1,000 of cash in its vault would therefore cost the bank €1.785 per year. But if the bank deposited that €1,000 at the ECB, it would cost €3.00 per year. Multiply the difference of €1.21 by tens or hundreds of millions, and pretty soon you’re talking about some real money.
Banks have a total of €245 billion deposited at the ECB. At a deposit rate of negative 0.3%, extrapolated over a year, it costs them €735 million in punishment interest.
“Punishment interest is already costing real money,” is how a senior central bankers explained it to the Frankfurter Algemeine.
While there might be some additional costs involved for savings banks, such as for transportation of cash or more burglary protection, storing cash in their vaults would still be a better deal and would be worth considering.
There have been some requests for a “ECB-cash protection” program, a spokeswoman for the Association told the Frankfurter Algemeine but refused to give precise figures. Nor did the Association make any information available on the amount of punishment interest already paid by the savings banks. But it could, as the paper put it, “involve millions of euros.”
To get insurance for this additional cash-in-vault, savings banks can turn to the Versicherungskammer Bayern, the largest public insurer in Germany. It has forever been offering savings banks in Bavaria and elsewhere insurance for their cash holdings. To get “ECB-cash protection,” a savings bank just needs to change its existing policy.
And so the Frankfurter Algemeine:
In central bank circles, these considerations by financial institutions are carefully noted; they show that punishment interest that exceeds the pain threshold can possibly lead to reactions designed to dodge the thrust of the ECB. The objective of the ECB is to push banks to lend more. But if they store the cash in their vaults, it would be counterproductive.
Punishment interest costs banks more than just the interest they have to pay the ECB: the entire negative interest rate environment is squeezing their profitability. It might work a little better if they could charge savers big-fat negative rates on their deposits, but that would trigger the instant evaporation of cash from the system.
Unperturbed by any sense of reality, Draghi has given the markets to understand that he will ratchet up the pressure. The ECB’s Governing Council will decide the next steps on Thursday. Markets have big expectations, hence the recent rally. Alas, last time he jawboned stocks higher with his promises – or threats, whichever – they plunged after the announcement.
Now the market thinks that the ECB will jack up the negative deposit rate to minus 0.4% or even minus 0.5%, and to make it less destructive for banks, the rates might be hiked in tiers. To which the Frankfurter Algemeine adds:
Higher negative interest rates increase the incentives for banks with lots of excess liquidity to look for alternatives.
Such as keeping that cash in their vaults instead. But this is just one of many unintended consequences and outright absurdities of NIRP. Read…. “Perverse, Unpredictable Effects” of Negative Interest Rates: Mortgage Rates Soar in Switzerland
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Is the ECB charging negative interest on all excess reserves or, like the BOJ, only a portion?
“And so Bavarian savings banks have had enough. The Frankfurter Algemeine has obtained a memo by the Association of Bavarian Savings Banks that openly encourages its member banks to stash cash in their own vaults rather than depositing it at the ECB and paying the penalty interest of 0.3% to the ECB on these deposits.”
I’m no genius but this is obviously a step towards de-civiliazation, caused by ECB policies. It’s incredible the people running things don’t see this…or…they do this this and is part and parcel of the neoliberal agenda in general, like austerity.
Thus the efforts to ban high valuation bills…
So it turns out that a worse evil than drug barons snorting product through 500 euro bills is banks stashing them in the vaults. Personally I think this encourages a new golden age of traditional bank robbery. The only sure winner of this is the insurance industry.
…is this a small indication that there might be something akin to the human immune system and the wondrous little elements of our physiology that comprise our homeostatic balancing mechanisms?
Or just about the money?
Is this the beginning of the end of the Eurozone?
The beginning of the end was the introduction of the Euro. There was no way it was ever going to work.
And I dont think this is the end of the beginning of the end, either.
I’m a little late to this dicussion, but that raises an interesting question. When exactly was the euro introduced? Are you talking about the specific implementation called the euro (EUR) that replaced the ECU (XEU – European Currency Unit), or are you talking more generally about fixing exchange rates? Because France and Germany have been pegging their currencies to each other (or more accurately, France pegged the franc to the West German mark) since the 1970s. This has been going on for four decades, essentially dating to the collapse of the Bretton Woods system’s gold-backed USD which the ECSC (European Coal and Steel Community) and EEC (European Economic Community) had used previously.
The Franco-German core of Europe has not had truly floating exchange rates for any meaningful length of time during the entire post-war period. This is why the UK has always been an awkward fit and has not adopted the euro to this day; London, as both a financial center and special relationship with the US, is nervous about giving up autonomy to the much larger combined weight of Berlin and Paris.
The moment Paris decides the benefits of being tied to Berlin no longer outweigh the costs, the euro is history (or, said differently, at such time the euro simply reverts to being the deutsche mark). But the story of the past 60 years so far – and especially the past 40 years – has been tighter integration, not pulling apart. Germans like cash (as in, they still actually use it) and Bavaria is the wealthiest region in Germany, so it makes sense that local savings banks there would keep cash on hand as the ECB goes further into bank bailout mode for the financial fraudsters. That in no way threatens EMU; if anything, it serves as a bit of a release valve for pressure that might otherwise show up elsewhere.
First, there was “Grexit.” Then, “Brexit.” Are we soon to see a bank exit: “Banxit”?
One of the more amusing aspects of this situation is that it’s caused in large part by the austerity programs espoused by Germany. The reason banks aren’t lending money is that they don’t see any promising investment opportunities. The lack of investment opportunities is a direct result of the EU’s harsh austerity programs. As the EU lacks enforcement mechanisms, they may want to consider carrots versus sticks… say, by encouraging government spending now, and putting austerity programs in effect when things turn around.
As we’ve seen, irresponsibly spending during the good times coupled with harsh cuts when times are bad merely amplifies the roller coaster effect. The time to set up a rainy day fund is when it’s sunny – not during monsoon season. One would think the EU would have figured this out by now.
The post-Bush II EU leadership are compradors. They’re there to put the screws to their charges, and that’s what they’re gonna do, come hell or high water.
The lack of investment opportunities..
Two kinds of investment – value and growth.
Value investment is buy low, sell high.
Growth investment is buy high and sell higher.
Looking at housing and the stock market, we see that there are not too many investment opportunities, because bubbles.
If they’re going to do austerity, they should do austerity on military and pork spending, and they have to let the bubbles burst, to create value investment opportunities.
A more fundamental austerity is the austerity through free trade and globalization – witness the dying voters who are flocking to Trump. To overcome that austerity, we have to look at those free trade deals.
As for growth investment opportunities, like China, we should focus on reform (reforming wealth inequality) more than just saying we need more GDP growth.
MyLessThanPrimeBeef @1:37
“A more fundamental austerity is the austerity through free trade and globalization…”
Yes. And one of the particulars is tax evasion, which still isn’t getting nearly enough attention, IMO. An interviewee in the documentary, Tax Free Tour, summarized it well, “It’s very hard to compete with zero.”
The giant sucking sound heard ’round the world was the wealth of nations falling into a gargantuan black hole. Supranationals and their owners can’t pay nothing while the people pay 35% to 40% tax on wages, work fewer hours at lower pay, pay more VATs, with cuts to social programs forever. Sure, the black hole may belch up some of what it devoured in the form of loans at interest to governments, but black holes eventually vaccuum up all the matter in their neighborhoods.
From Draghi’s memoirs 2026: “We had to destroy the Eurozone to save it”.
rock and hard place. If the central banks ease or nirp nobody trusts them because nobody wants to invest heart and soul into a business when it could be crushed by the next capricious monetary decision. If they don’t ease and/or if nations are so intimidated by the spectre of inflation that there is neither easing nor fiscal spending then there will be only a slowly sinking economy. So at no point in this situation will growth ever return. Economies are all going to be planned and implemented. A good era to repair the planet. NIRP could be very useful for the environment. But it won’t bring back old fashioned capitalism, if it ever existed. Wouldn’t global devaluations be a better way to rebalance over supplies of currencies and goods? Same as having a nice little bonfire.
When we hang the last central banker, that will be a good start.
I am in awe at bizarro world where cash, or let’s say my work product, has such little value that banks charge me to store it. It makes me wonder why I bother working for it.
Or I can buy gold. Gold is real money. It costs me 25 bucks a year to store 50k. I just keep shoveling fiat and buying the dollar put. It sounds like the Europeans are starting to catch on.
think gold
This fits right in with a recent Zerohedge piece that claims sales of safes in Japan have jumped significantly since the BoJ introduced negative rates.