Low & Negative Interest Rates Get Broadsided by the BIS

They undermine banks. To dodge the fallout, banks chase yield, buying stuff like CLOs, instead of lending. When loans go bad, banks may “evergreen” them. 

By Nick Corbishley, for WOLF STREET:

Prolonged low interest rates are having significant negative effects on banks’ core business and role in the economy, the Bank of International Settlements (BIS) warned in a new paper, just weeks after the ECB reduced its policy rate deeper into the negative after a tumultuous meeting where ECB president Mario Draghi steamrollered a veritable palace revolt.

According to the BIS paper, which is based on a sample of all major international banks over a 22-year period from 1994 to 2015, if the benchmark interest rate falls from 3% to 0%, the average net interest margin declines from 1.42% to 1.31% of total exposure. That’s in the short term. The long-term effect is many times larger owing to the high auto-correlation of the net interest margin. Banks’ average interest income falls from around 60% of total income to around 40%.

This is just one of the problems highlighted by the BIS study. Another major concern is that many banks, in their desperate quest for profits, opt to shift their focus away from lending to their customers toward trading activities, which can generate higher yields and fee-based income. It also tends to boost stock, bond and real estate markets, as well as stimulate demand for professional portfolio management services.

In the short term, trading in stocks, bonds, derivatives and other financial instruments may allow banks to offset their declining profits on their interest spread. If the benchmark interest rate decreases from 3 to 0%, trading profits as a proportion of total income increase from 2.5% to 3.2%. But it also opens them up to greater risk, especially if they chase yields offered by more speculative financial products such as Collateralized Loan Obligations (CLOs) backed by corporate junk-rated leveraged loans.

The one thing many banks are not doing is precisely what the central banks want them to do: lend more to businesses. This “credit intermediation” is the essential role commercial banks perform in the economy by taking short-term deposits from business and retail customers and lending the cash out long-term. Put simply, they “intermediate” between people who have money to lend and people who want to borrow money. A bank puts its depositors’ cash to work in the economy by making loans to finance the construction of, say, a factory or an office building or the purchase of a house. But it is this function that low and negative interest rates are making less and less profitable, while decimating savers along the way.

Banks, long accustomed to making money on the spread between the interest rate they pay on deposits and other funding sources, and the interest rate they charge, realize that most retail customers won’t accept negative interest rates on their deposits. Rather than paying for depositing their funds or savings, they’ll take their money out. The German government, in a bid to placate the country’s legions of long-suffering and increasingly irate savers, has even threatened to outlaw negative deposit rates altogether.

The result is that banks cannot lower the rates they pay on deposits any further, which puts a floor under the cost of funding for banks. But at the same time, the banks face growing competitive pressures to lower the interest rates they charge on loans, such as mortgages, and the spread further contracts, making it harder and harder for banks to extract profit, particularly in the retail segment.

Capital-challenged banks are particularly liable to cut lending when interest rates fall, perhaps in order to restore — or at least try to restore — their regulatory capital ratios by shifting their exposure from loans with high risk weights to investments that carry a lower risk weight such as sovereign bonds. Some studies have suggested that corporate loans are more sensitive to the interest rate environment than mortgages and consumer loans.

Another way banks are offsetting their shrinking interest rate margins is by ramping up fees on the basic services they offer, including lending to businesses and households, with the result that actual borrowing costs in the economy remain relatively high even as the benchmark rates fall, negating one of the ostensible aims of the central banks’ low or negative rate policies: to boost lending. According to the BIS report, if a benchmark interest rate decreases from 3% to 0%, average fee income increases in the short term from 14.2% to 15.2% of total income.

But ramping up fees is a short-term solution that can’t mitigate the banks’ gradual loss of their core business model: their credit intermediation role. As this model is further eroded away by the central banks’ low and negative interest rates, many banks get weaker. Ominously, the report warns, provisions against losses on lending have fallen, which may indicate that potential problem loans are being repeatedly rolled over (referred to as “evergreening”) as a means of obscuring the rising risk on their balance sheet.

The sample period of this BIS study ran to 2015, meaning that the problems identified in the study are likely to be even worse today, especially as interest rates have plumbed new lows in some jurisdictions. In its conclusion, the BIS report suggests that national central bankers should be alert to the risk of evergreening, but even as lenders in Europe and Japan scream for an end of the negative-interest-rate policy, the report fall short of cautioning those same central banks against cutting interest rates any lower. By Nick Corbishley, for WOLF STREET.

A gigantic spike in three years. Read… Interest Rate Derivatives Trading Explodes to $6.5 Trillion/Day

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  66 comments for “Low & Negative Interest Rates Get Broadsided by the BIS

  1. BoyfromTottenham
    Oct 3, 2019 at 1:20 am

    If ZIRP and NIRP are causing banks to stop taking deposits and lending them out to borrowers they no longer are operating as banks. Who then is going to take their place? The government? This craziness has to end. But does anyone know how?

    • Old Dog
      Oct 3, 2019 at 1:35 am

      There’s this thing called shadow banking. Also, there’s Vito Corleone’s family. They will be happy to lend you money at 12%. 11% if you make good spaghetti alle vongole.

      • Frederick
        Oct 3, 2019 at 4:07 am

        You really are old if you think the Italian mob is our worst enemy They are like Mother Teresa compared to the mob running things now

    • doug
      Oct 3, 2019 at 7:12 am

      Are business development corps providing funding where banks used to?
      such as owl rock capital

      • GSW
        Oct 3, 2019 at 2:51 pm

        Yes. But they get their leverage from the banks. Without that leverage, or if their pool of loans deteriorates and their credit lines get pulled, they lose access to that liquidity.

        Banks have simply stepped back from making the riskier loans directly to borrowers, and are instead financing the BDCs/CLOs on a portfolio basis. Basically funding their competition, because someone is going to do it, its seen as less risky as making one leveraged loan to one borrower, and it generates at least some yield.

        It’s a really odd time.

    • Morty Mc Mort
      Oct 3, 2019 at 8:17 am

      You are all forgetting one of the fastest growing sectors, competing with Banks – Fin Tech Companies ( Many of the App Based Fin Tech Co’s are growing at astounding rates). From higher interest savings, to low cost Credit Cards and Lending – These groups are giving the big banks a fright.
      They limit the ability to fleece the customer as much as they would like…

    • GP
      Oct 3, 2019 at 6:54 pm

      It’s poetic justice. Banks made a deal with the devil (central bankers) and now their soul is being taken away.

      Emergency liquidity and bailout in return for heavy regulations and arbitrary central planning. If only they were responsible with their lending and risk hoarding.

      • Oct 4, 2019 at 9:18 am

        They didn’t have much choice, the Fed oversees the charter banks. The deal was worse in Europe where DB never recovered. When banks first functioned as conveyances with no oversight, (mortgage crisis) they lost their virginity. That is also a matter of regulation. Then of course the notion that main street matters became obsolete. The Fed eats it’s own children, headline. Fed never was a private bank and was always going to bow to political pressure. If they had their own skin the game it would be different story.

  2. fred flintstone
    Oct 3, 2019 at 2:16 am

    Sure….raise taxes on the rich and spend it by distributing it to the poor and buying infrastructure. Demand goes sky high, rates go up, inflation goes up and the deficits go down. The key would be hit the rich where it does not hurt. Estate taxes should be brought up substantially. Sales tax/VAT on luxury goods could follow. A 1% wealth tax on assets over 100 million could be considered. Apply the payroll tax on incomes over 130m. Keep corporate and income taxes relatively low.
    The trick would be to have all the taxes expire when the baby boom has fully retired.

    • Frederick
      Oct 3, 2019 at 4:11 am

      You’re an anti-Boomer aren’t you ? Everything is our fault Got it

      • d
        Oct 3, 2019 at 10:16 am

    • Rowen
      Oct 3, 2019 at 4:41 am

      Get rid of stepped-up basis. There really is no purpose other than to maintain generational wealth.

      • RD Blakeslee
        Oct 3, 2019 at 6:14 am

        important purpose for our family: To compensate our children for their contributions to their parents generation’s social security and other government sustaining programs for retirees, which the children will not enjoy in their retirement. Demographics preclude that.

      • fred flintstone
        Oct 3, 2019 at 11:57 am

        I agree

    • Nicko2
      Oct 3, 2019 at 5:00 am

      That sounds like a perfect recipe to scare away high net worth individuals from US shores. ….and of course, you’re conveniently forgetting the US is already one of the preeminent offshore safe havens in the world. Wealth taxes are toxic, and usually fail.

      • timbers
        Oct 3, 2019 at 6:50 am

        You make is sound as if scaring away high net worth individuals from the U.S. would be a bad thing.

        I suggest you check your premises, and change the last line too:

        Wealth taxes are beneficial, and usually work.

        • Tammy Cartwright
          Oct 3, 2019 at 8:28 am

          Why even have taxes. Just take it all. Take more and more until it is all gone. Just like the minimum wage policy socialists and communists, progressives which really means the opposite there is no progress with their policies for the many of population it is greatly destructive.

          Minimum wage should not be at $15 an hour but do $30, $40, $100 an hour because it works better when you do more and make it higher and higher.

          Come on, this wealth confiscation, redistribution and theft was tried by the Jimmy Carter and then Obama look what happened, it failed and was a total disaster. It never works and will never works, U.S.S.R., Venezuela, Argentina, Zimbabwe, Chile, Cuba, Zimbabwe, Vietnam, India, Sweden and even China will be a basket case as communists will show their true colors like Hing Kong now. Lefties, socialists, communists, central or command economies are the worse economic and political systems in history and killed more people and destroyed more lives in history.

          By the way, low to negative interest rates is not a capitalistic or democratic policy, it is a socialist one like the European Union and UN is. See how much destruction it is causing.

        • 635
          Oct 3, 2019 at 3:08 pm

          Proof please, income taxes average around 18% of gdp when marginal tax rates were 70% or in the 30% over the last 50 years.High rates do not work

    • Xabier
      Oct 3, 2019 at 5:06 am

      Taxes that expire?

      Oh, beautiful dream!

      Taxes hang around like syphilis…….

      • RD Blakeslee
        Oct 3, 2019 at 6:16 am

        … and the infected weenie …

      • Paulo
        Oct 3, 2019 at 9:31 am

        It’s not taxes and tax rates, it is what your Govt prioroties are. It also reflects what the population on a slow boil is willing to toerate from their leadership. After all, 800 World-wide military bases and endless wars have to be financed somehow.

        https://www.cnbc.com/2017/08/07/canadians-may-pay-more-taxes-than-americans-but-theres-a-catch.html

        The article a little dated, but worth the short read.

        “But some rich Americans actually tend to pay a bit more than rich Canadians. The average top marginal tax rate on wage income in Canada is 45.7 percent. In America, it’s a bit higher: 47.9 percent.

        The rate is highest in California (51.9 percent) and Quebec (50 percent), and it’s lowest in Alberta (39 percent) and Texas, Washington and Wyoming (42.8 percent), according to a Policy Alternatives report from 2015.”

        Respectfully, and this is directed to Tammy’s comment above, the US is already a socialist country. But….only for large corporations, the MIC, and banks. Wait until the next round of bailout screaming starts to be reminded of everything. Reality has nothing to do with electioneering and poitical rhetoric which is all that is currently reported these days….except on Wolf Street, of course.

        • Tsuda
          Oct 3, 2019 at 10:25 am

          To be clear, Canada’s top rate applies at around 160K US, and US top rate applies at over 400K!

        • BarSteward
          Oct 7, 2019 at 3:48 pm

          never a truer word than your last paragraph.

          The people that rail against the perceived threat of ‘socialism’ seem to conveniently forget the fact that the 1% are latched on to the teat of the cash cow, while simultaneously slaughtering it for the meat, rendering it down for glue, and betting that it’s young will provide the same again, while starving them to death or leaving them to predators. No sane individual society or individual would do this.

    • Scott
      Oct 3, 2019 at 8:28 am

      Why would the deficits go down? Politicians spend more than the government takes in now by about $1T per year. All these politicians want to do is spend more money on new programs to get re-elected.

    • Bobber
      Oct 3, 2019 at 11:06 am

      I like your ideas. There is no better time to pay tax than when you are dead. The estate tax, or death tax they call it, is a wonderful thing.

      Keep the income tax rates low when I’m alive. Increase them after I’m dead.

      • Xabier
        Oct 3, 2019 at 12:20 pm

        Well, the Left are talking about 100% inheritance taxes as ‘socially just’.

        However, it should also be understood that inheritance, rather than being inherently an injustice, is the basis of a civilised society, promoting stability and continuity, rewarding the prudent and astute.

        Feudal lords initially tried to take everything owned by the deceased if he died on their territory, and the Turkish, Arab and Persian and African despots did much the same – with poor results on the whole.

        No one ever felt that they or their heirs would enjoy the fruits of their labours.

        With interest on savings already, and probably permanently so negligible, deprivation of the possibility of inheritances will reduce everyone to serfdom.

        • Bobber
          Oct 3, 2019 at 4:49 pm

          I had to chuckle at the thought that your average trust fund baby is “prudent and astute”. How can you say a person is “prudent and astute” by virtue of lineage?

        • GP
          Oct 3, 2019 at 8:54 pm

          Chuckle? Might as well cackle while advocating plunder of private wealth.

        • craig
          Oct 4, 2019 at 5:58 am

          @Xaiber

          It was the threshold of IT that kept colonial taxes low and provided oppotunity in America(4 sons would each get 1/4 of estate to avoid taxes) instead of the all for one of europe.

          100 IHT would eliminate all the prattle about,how it doesn’t matter where you come from as well as the complaints.

          The question is if we want to be just or not.

        • GP
          Oct 4, 2019 at 12:06 pm

          @craig,

          Wealth is accumulated over the years – with hard work, with savings, with sacrifices and most importantly, after paying taxes.

          Many cases wealth is built with the efforts of whole family – farms, factories, small businesses.

          You are suggesting taxing all that private wealth once again? Why? Just because? And you call it justice?

  3. A. Lurker
    Oct 3, 2019 at 3:27 am

    But if banks only create the principal amount of the loan into existence, where is the money required to pay the interest coming from?

    Think the answer is other loans, i.e. ‘growth’. In this way our monetary system for ever expands or collapses if there is no growth.

    • medial axis
      Oct 3, 2019 at 4:02 am

      No, it’s a common myth loans have to keep increasing and so lead to eventual collapse. As said in [2]. Interest is the bank’s profit, which it spends back into the economy in the form of wages etc.

      So for instance, in a toy economy with only one bank that’s loaned out £1000 at 5% interest: There’d be £1000 in circulation. The bank would receive £50 a year in interest which it’d use to pay wages etc. So the £50 ends up back in the economy. Such a system can go on forever with no need to increase loans.

      • A. Lurker
        Oct 3, 2019 at 4:09 am

        How is that possible if the toy economy only has a total of 1,000 how can the borrower repay 1,000 + 50 in interest?

        • medial axis.
          Oct 3, 2019 at 5:19 am

          Okay, that’s a different question. Off hand, I have no idea. Have you?

          I’ll have a think about it, when I get the time.

          But just to be sure, what you’re asking is, “How can the economy repay all that it’s borrowed including interest?”, right?

        • Resjudicata
          Oct 3, 2019 at 8:46 am

          I don’t know the answer to this, but it seems to me that if all money is lent into existence, and the borrower owes principle plus interest, by nature there will never be enough money to pay all the debt. As a result, more money has to be lent faster or the music stops. If this is wrong, please explain.

        • medial axis
          Oct 3, 2019 at 10:32 am

          Right, I’ve found a model that works but we need to go back to the start, to an economy with no money in it: At the start of 1st year (in which money is used) the economy borrows £1000 (at 5%) and during that year the bank pays £50 in wages etc (which in lends to itself at 0%, if you like). So at the end of the year, and all subsequent years, there’s £1050 in the economy (as the £50 is always recycled back into the economy via wages etc). At the end of any year the economy can either run for another one, after paying the £50 interest, or pay off the £1050 and go back to barter, or whatever it was using before it took up money.

          This is not to say we cannot get into the state where it’s no possible unwind all loans. Indeed it seems we might already be there with unwinding QE!

          Hopefully Wolf will permit this post. I’m likely getting near the limit on % of posts and/or going off on a tangent to the subject of the article. I’ll make this my last anyhow, as I’ve some other stuff that needs doing. Thanks for the question, makes attending this site worth it.

        • A. Lurker
          Oct 3, 2019 at 10:39 am

          Yes, that’s it, there’s not enough money in the system to repay principal + interest.

          Think this means our monetary system is a Ponzi scheme that requires new money to function.

          The tragic news is that it means perpetual growth in a finite world.

          This fact eludes both the left, the right and economists but we will start to see the effects once the system is to large – pollution, resource depletion and resource wars…

    • Petunia
      Oct 3, 2019 at 9:54 am

      It’s not just banks that can create money, the govt does as well. The govt can create an obligation on the signature or pledge of any authorized agent of the govt. These “contracts” are created all the time, black budgets that have to be funded, aid that is pledged, confiscation of assets, etc. All are examples of money creation.

      • sierra7
        Oct 4, 2019 at 8:57 am

        Petunia:
        And, there’s always the global covert drug money to make up the difference!

  4. William Buchanan
    Oct 3, 2019 at 3:33 am

    the BIS study ran to 2015 there is nothing like being up to date {sar}

  5. ZeroBrain
    Oct 3, 2019 at 3:48 am

    Thanks for taking the time to post. More people should understand this, but I find that most people instinctively recoil and say “No way!”.

    • Frederick
      Oct 3, 2019 at 4:08 am

      Easier to just stay in denial Been there done that No thanks

  6. Xabier
    Oct 3, 2019 at 5:00 am

    Hmm, covering their backsides for when it all goes down: ‘We did warn you’?

    Hardly needed so long to divine what the results of these rates would be.

    We really get so little from our Wise Men, bring back the shamans……

  7. Kent
    Oct 3, 2019 at 5:39 am

    “But at the same time, the banks face growing competitive pressures to lower the interest rates they charge on loans, such as mortgages, and the spread further contracts, making it harder and harder for banks to extract profit, particularly in the retail segment.”

    This is the interesting question to me. Why don’t “competitive pressures” ALWAYS cause spread compression regardless of whether rates are high or low? It seems something else is going on here.

  8. Joe
    Oct 3, 2019 at 5:46 am

    Wells Fargo has been caught a few times creating accounts and fined…
    This is an absolute joke as the fine could be created in a new account and sent out as a forgivable loan or stay on the books as an interest free loan.

  9. David Hall
    Oct 3, 2019 at 5:59 am

    In the US the yield curve flattened, then inverted. An inverted yield curve often preceded a recession. Falling net interest margins may result in a tightening of bank lending.

  10. Benjamin Cole
    Oct 3, 2019 at 6:39 am

    Yeah, and also we depend on commercial banks for the endogenous creation of money….if banks lend out less, you get less money creation.

    I hate to say it, but money-financed fiscal programs, aka helicopter drops, are necessary.

    So say Ray Dalio, BlackRock, Pimco, Stanley Fisher, Adair Turner and maybe even Michael Woodford.

    Hey, what is, is,

  11. RoundAbout
    Oct 3, 2019 at 7:46 am

    Someone should start Cash Bank. Cash Bank would put physical cash in a deposit box and guarantee they would not invest it — the cash sits in the box protected. You would make no interest because the cash is not being loaned out. But they would charge a yearly fee for the service. Part of the service would be taking a picture of the physical cash in the lock box, yearly audit, checking counterfeit cash and providing identity services for physical presence withdraws and deposits. Or services obtaining larger amounts of physical cash to be withdrawn or deposited. Also, the fee would pay for security in every aspect.

    • Joe
      Oct 3, 2019 at 8:41 am

      On many levels, that would not work.
      You need employees to pay for the paperwork, security to protect the cash, a massive secure place to store the cash as inflation forces the creation of more cash especially if the higher monetary notes are not being created.
      Shovels and wheelbarrow for all the dollar bills…

  12. Xabier
    Oct 3, 2019 at 8:56 am

    Perfectly accurate, banks create money through their loans.

    Banks are also slowly destroyed by the low/negative interest rate environment.

    It would be good if politicians could appreciate this……

    The viability of all debt will be increasingly imperilled by the resources crisis we : no rich seams to exploit anymore, and a dying planet……

    The root of all economies is material reality, and that is about to fail us over the next few decades.

    • Anon1970
      Oct 3, 2019 at 10:46 am

      Very low interest rates also hurt individual savers and small organizations that have seen their interest income shrink dramatically over the past dozen years, for a given level of savings.

    • Oct 3, 2019 at 2:12 pm

      Not exactly. Banks lend money for new businesses, and the new economic activity brings money into the system. When the banks do not lend out that money there is no “added” growth, there is no new money, but a rise in asset values from financially engineered or speculative investments which adds to the corporate bottom line, or the broker or hedge fund. That isn’t real money until the speculator takes a profit. In the case of share buybacks that never happens. The money is permanently retired for the temporary advantage of higher stock prices.

  13. ZeroBrain
    Oct 3, 2019 at 9:14 am

    Okay, Wolf, Nick,

    What is with removing comments (I forget the username – was it “medial axis”?) around the mechanics of money creation? You really seem to hate that and discussion of US foreign policy and military interventions.

    Anyway, I cancelled my recurring donation and this is my last post. Cheers.

    • Just Some Random Guy
      Oct 3, 2019 at 11:57 am

      I always like to call him Former Enron Advisor, Paul Krugman.

    • drg1234
      Oct 3, 2019 at 1:31 pm

      I am neither Okay, Wolf, nor Nick…

      But Medial Axis is a fucking idiot.

    • Oct 3, 2019 at 1:35 pm

      ZeroBrain,

      It’s a religious belief that a bank just creates the money it lends out. I have spent hours debunking this religious belief here many times. I have explained in detail why this belief is nonsense, and why no individual bank can create the money it lends out, but why money is created by the banking system overall in conjunction with rising asset prices. Conversely, when asset prices decline, money is destroyed in the banking system. These are the ebbs and flows of money creation and destruction.

      Banks get in trouble because they run out of money. And then they collapse. If an individual bank could just create the money it lends out, no bank would ever collapse, and the financial system can never get in trouble, and the financial crisis would have never happened.

      “medial axis” keeps posting the same link to a PDF that he has never read, of which he only understands what some media headlines have said about it. If he read the document, which is technical and complicated and long, he would see that what it says is not what he says it says.

      And “medial axis” is like a broken record on this. He has totally ignored my efforts to get him to understand reality. I have wasted hours explaining this. So now I just delete this nonsense.

      I’m OK with people believing whatever they want to, but they cannot use my site to proselytize.

      • WSKJ
        Oct 3, 2019 at 2:21 pm

        Thx, Wolf; let’s see if I’m getting this right:

        the banks don’t create money, but they do have ACCESS to REAL money.

        Now, I am left with the question: was Ben Bernanke’s “helicopter money” real money ?….or was it Monopoly money ??
        (sarc)

        Wolf, you’re a hero; as usual, thanks again.

      • Wisdom Seeker
        Oct 3, 2019 at 6:23 pm

        Wolf, there’s a fairly solid article from Forbes which straightens out the quasi-religious myth brewing out of that Bank of England PDF. You might try referring people here:

        [DELETED BY WOLF]

        • Oct 3, 2019 at 11:06 pm

          Wisdom Seeker,

          You just did the exact thing that makes me delete this crap. You Googled around until you found some article – this one on the blogging platform of Forbes – that supports your religious belief, and you link it here as proof or your religious belief, and you make me waste my time by having to go there and look at it and then shred it.

          So I looked at it and I’m going to shred it right now. I deleted the link and the excerpt you posted because I don’t want to promote this garbage on my site. But you know who we’re talking about since you dug it up.

          The guy who wrote it is an accounting moron who never even sat through the first day of Accounting 101. And he doesn’t know anything about banks. But he discusses both. How do I know he is a total accounting moron who never even had a single day of accounting class?

          Because he wrote this ignorant statement:

          “The rules of double entry accounting dictate that when banks create a new loan asset, they must also create an equal and opposite liability, in the form of a new demand deposit.”

          No. Double-entry accounting does NOT mean one entry must be an asset and one entry must be a liability. It means “debits” and “credits.” Repeat after me until you get it: Double-entry accounting means “debits” and “credits.”

          It means each accounting entry has a debit and a credit. That’s what “double entry” means. But debits and credits have nothing to do with assets or liabilities. You debit and credit any account, asset accounts, liability accounts, revenue accounts, expense accounts, goodwill accounts, equity accounts, etc. On the most basic baby-level, think of debits and credits as kind of an accounting version of plus and minus.

          When a bank extends a $1,000 loan to an outside borrower it makes two entries, on the most basic level, both of them in ASSET accounts:

          One, it reduces its “Cash” account by $1,000 because it sends the borrower $1,000;
          Two, it increases its “Loans” account (also an asset) by $1,000 because it now has an outstanding loan of $1,000 that it expects to earn interest on.

          Note it decreases one asset account and it increases another asset account by equal amounts, and everything is in balance. There is no liability account involved.

          And there is no money creation involved.

          The two accounting entries are this: credit $1,000 to “Cash” and debit $1,000 to “Loans.”

          I just hate to have to waste my time with this garbage that you linked. And I know I wasted my time because I cannot change your faith in your religion with the facts I just posted. You will continue to follow your religion, and that’s fine with me. But in the future, your comments on this stuff will go into auto-delete without second thought.

  14. Just Some Random Guy
    Oct 3, 2019 at 11:56 am

    There is interest being paid, you just need to look for it. I had a few hundred $K to park for a few months. All that money is in short term FDIC insured CDs earning 2% as I type this.

    Obviously 2% is nothing to write home about, but it’s also not 0% or negative rates that everyone seems to be talking about.

    And if you want a full year CD, rates are as high as 2.5%. You won’t get this at Bank of America or Wells Fargo. But plenty of small banks will offer these rates.

  15. Rob
    Oct 3, 2019 at 12:24 pm

    Something doesn’t add up here. As far as I can understand:

    – Central banks of each country are owned by the private banks.
    – The Bank of International settlements is owned by the central banks.

    In the west (all OECD countries and more), to prevent the implosion of the existing world order, the central banks have stepped up to the plate to hold interest rates at historic lows or near zero for the last ten years. This is to prevent rising interest rates imploding the overpriced real estate in these countries and causing the banks to go bankrupt through the collapse in collateral values that would result.

    So what do they want? Can’t they decide? It cannot be that both high interest rates are bad for banks and low interest rates are bad for banks. Presumably, according to the BIS website page here the central banks of the various countries do talk to each other:

    https://www.bis.org/about/member_cb.htm?m=1%7C2%7C601

    As you would expect from soviet style central planning, the so-called “captains” at the head of the BIS ship have no idea what interest rates should be, which historically would have been set in the aggregate by individual participants in the various bond markets.

    As an interesting aside, in the list of BIS linked central banks, we can see the Russian Federation and China. So when it comes to foreign policy they are “enemies” of the west but when it comes to scamming the little guy out of his deposit interest they are all happy to cooperate, although Russia seems an outlier as it seems possible to get near 8% on deposit there. A cursory look through that list and I cannot see any other country with a decent deposit rate. Quelle surprise! And how convenient for the arms manufacturers that aside from the most core functions of government (central banking) those countries can be enemies. I am sure Lockheed Martin are thankful.

    So if it is all manipulated centrally, the only winning move is not to invest. I cannot see any of the Caucasus countries on that BIS list (Azerbaijan, Armenia, Georgia) and they all have deposit rates near 9% or more. So the BIS list of members would seem to be a good first check on where not to place your bank deposits.

    Perhaps the strangest thing is that unsecured credit interest rates on credit cards seem to be similar in BIS and non-BIS linked countries. However in the non BIS linked countries it seems possible to get considerably more on your bank deposit. This would follow because in the non BIS countries the banks actually have to attract capital from depositors instead of being given it at an artificially low rate from the central bank.

    The mechanism of how the BIS member central banks reduce the interest rates through operations in the government bond markets I don’t fully understand though. They must get money in order to bid up these assets out of the price range of the free market that would otherwise exist. I can only assume they either steal this money from tax payers or by debasing the currency. Or that they use derivatives to achieve the same control task through their commercial banking friends, controlling much more market than the “real market” would be able to and drowning it out. Others please enlighten me…

    The one thing I am sure of is it all reeks of fraud. Communism for the big banks and capitalism for us serfs. I would love to see all this fraud collapse if the implications weren’t so sobering. The referenced BIS article seems to be further evidence that even those at the top don’t know what they are doing. There is a first time for everything I suppose. If it all goes pop, who could have known?

    • Oct 3, 2019 at 2:21 pm

      Rob,

      Your second line — “Central banks of each country are owned by the private banks.” — is nonsense. Here are some examples:

      The ECB is owned by the central banks of the member states. The Bundesbank is one of those national central banks, and it is owned by the German state.

      The Swiss National Bank ownership is as follows: 55% owned by the Swiss Cantons, and 45% owned by the public via publicly traded shares that you can buy on the stock market.

      The Bank of Japan ownership is as follows: the Japanese government owns 55% of the shares of the BOJ and has 100% voting rights. The public owns the remaining 45% via shares that are traded on the stock exchange, and you’re free to buy those shares.

      The People’s Bank of China is an integral part of the Chinese government.

      The Bank of Russia is owned by the Russian government.

      The Fed is somewhat unique, in that it is a hybrid. Its 12 regional Federal Reserve Banks are owned by the financial institutions in their regions. But the Board of Governors is an independent federal agency, owned by the federal government, and Powell and everyone else working for the Board of Governors are a federal government employees.

      • Rob
        Oct 3, 2019 at 3:55 pm

        Hi Wolf,

        Many thanks for your insights. I don’t doubt I was in error there. I think I was thinking of the earlier history of central banking. Is it not true that in the early history both the Bank of England and the Federal Reserve (from the 1913 Jekyll Island meetings) were owned and started by commercial banks?

        Even if the central banks are no longer officially controlled by the commercial banks I think that it is obvious they control them, given the extent of regulatory capture by the banks of our governments, the revolving door and the number of links with banks such as Goldman Sachs etc.

        Without digging hard I can immediately think of Mark Carney and Mario Draghi as former GS alumni as well as Hank Paulson, former secretary of the US Treasury, a position seemingly quite close to the central bank operations to manipulate and control US interest rates. Steve Mnuchin (also GS Alumni) now holds that position.

        Even if the central bank employees have never held positions in commercial banks it seems common that they are “Advisors” to those same banks and therefore effectively on their payroll. I wonder who is advising who? Do the instructions flow out or in?

        For example the following wiki on the European debt crisis seems interesting. In section “Involvement in the European Sovereign Debt crisis” It mentions Mario Monti as Italy’s former finance minister and “International advisor to Goldman Sachs” etc. Similar entanglements are also evident between Greece and Goldman at that time.

        https://en.wikipedia.org/wiki/Goldman_Sachs#Involvement_in_the_European_sovereign_debt_crisis

        To me it seems the links are so tight between commercial banks and the central banks I am not sure I can see who else is controlling them and their policies. It doesn’t seem to be voters. Even if we can argue central banks are controlled by governments, it seems the capture of governments as a whole by the banks is complete. Malcolm Turnbull in Australia? Ex Goldman Sachs again. And no matter who gets into power, central bank policy never changes!

  16. WSKJ
    Oct 3, 2019 at 1:39 pm

    In the interests of staying on topic, I have just deleted remarks I was crafting re the subject of wealth taxes. It is easy to veer into wealth tax, from your subject above, of NIRPs and ZIRPs (when the government receives diminishing returns from taxing your interest income, it will naturally look at other ways to tax you).

    Thx, Nat (I believee from previous posts that this is your name), for this informative post. Warnings from various financial pundits, re possible problems stemming from the NIRPs, are on the increase, as your post shows.

  17. Hans Olaff
    Oct 3, 2019 at 10:53 pm

    Banks spend this money on beer at Octoberfest, a few billion is chicken feed. Banks already charge service fees, maintenance fees, paper fees, ATM fees and pretty soon the business of banking will revert to the core business of hoarding cash for the wealthy and the poor will eat cake crumbs.

    Banks in Germany paid 2.4 billion euros to the central bank to hold cash in 2018, the German government said in response to a parliamentary enquiry on negative interest rates.

    “I think bank boards and managers are smart enough to know what sort of reaction this would trigger,” he said at the same conference.

  18. Hans Olaff
    Oct 3, 2019 at 11:06 pm

    Re: ” the report fall short of cautioning those same central banks against cutting interest rates any lower”

    Yah, this is the meat of the bone! As we all have witnessed, all the QE in the world didn’t do anything for anybody, except corrupt entities that were bailed out and saved in order to go back to playing with fire. What good did it do to create a decade of synthetic, falsified economic stability, if these very same crooks are never held accountable? How can any country grow, let alone survive, if the only means of growth is focused into the pockets of criminals, who literally and figuratively took the money and ran wild with it? To get back to CB’s — they tossed out about $13 Trillion in play money with QE and our Fed went from about 5% with FFR to almost ZERO — so what did all that do, maybe lower unemployment for a few years, while banks heisted away taxpayer bailout funds — and now, here we are again talking about QE and banks that don’t work???

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