If “punishment interest exceeds the pain threshold….”
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 Allgemeine 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 Allgemeine.
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 Allgemeine 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 Allgemeine:
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 Allgemeine 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