ECB imposes negative interest rate | Hacker News Reader

ECB imposes negative interest rate

bbc.com

48 pointseplanit52 comments

The negative rate is only on deposits over a bank's minimum reserve requirements.

The negative deposit facility interest rate will also apply to: (i) banks’ average reserve holdings in excess of the minimum reserve requirements; (ii) government deposits held with the Eurosystem that exceed certain thresholds that will be set in the relevant Guideline to be published by 7 June; (iii) Eurosystem reserve management services accounts if not currently remunerated; (iv) participants’ account balances in TARGET2; (v) non-Eurosystem NCB balances (overnight deposits) held in TARGET2; and (vi) other accounts held by third parties with Eurosystem central banks when stipulated that they are not currently remunerated or are remunerated at the deposit facility rate.

[1] http://www.ecb.europa.eu/press/pr/date/2014/html/pr140605_3....

Which, given my layman's understanding, implies that the policy is at the same time idiotic and genius. More specifically, the deposits are mandatory and under the liquidity coverage ratio in Basel. Therefore, the negative rate will only have the intended effect as long as the financial institutions maintain a higher than required coverage. That extraneous buffer being minimised, the incentive will be to keep liquidity in government bonds and especially those from big economies with good ratings, essentially moving liquidity to the centre of the European economy (Germany and maybe France.) Therefore, the periphery economies will be funding the central ones. Genius. Or Idiocy. From a purely theoretic perspective, the efficiency of these economies should be bolstered, but this happens to the detriment of the periphery and more or less diminishes their chance to balance their performance. The question is whether the goal of the Euro Area is economic performance or economic balance and stability.

Instead of a simple down-vote, I would appreciate an argument. After all, I am not claiming to be an expert on the subject and I am completely open to being educated about how this measure could work out.

Meh. Monetary policy alone can't save the economies of the floundering European nations. If it's economic growth they want, they'll need to do something about actually reforming the stagnant, over-regulated business environment. Or streamlining government spending so they can lower taxes without crushing austerity measures. Or cultural changes, encouraging innovation and entrepreneurship.

Good luck with that.

True, but by definition monetary policy is the only thing a central bank can dictate. Fiscal policy is the domain of treasuries.

The Eurozone's problems don't really stem from "over-regulation".

The Eurozone is a diverse set of nations, but many of the economies with the worst problems have over-regulation in some areas, especially labor-related regulations. Oddly enough labor regulation has significant impacts on economic growth and unemployment. :P

I don't actually care to prepare a well-sourced and boring essay for this tiny corner of Hacker News. Instead, I will leave you with an approachable anecdote about trying to open a business in Greece selling olive oil on the Internet. You'd think this would be the perfect business for Greece, but (spoilers) it takes 10+ months and involves stool samples.

http://www.nytimes.com/2012/03/19/world/europe/in-greece-bus...

(Postscript. The article notes that some of the delays may be related to not paying the "speed tax", i.e. bribery. That is a story of the regulatory apparatus meeting Corruption for Extra Fun Times.)

Maybe. Anecdote is of course not entirely useful, but I know a former employer I worked at tried to find some local staff in the EU (NL) for one of our datacenter locations. After speaking with a local attorney about the requirements, instead we simply rented an apartment and cycled US-based techs through on 3 month intervals. It was far easier than dealing with hiring a full time local to do the same job even after including rent, airfare, and a company vehicle.

Less regulation and that would have been at least one, probably two, decent mid-range salary jobs for local IT folks fresh out of school.

http://www.businessinsider.com/titan-ceo-letter-to-montebour...

as a banker, before i had to buy government bonds using cheap government money and profit on that difference, and now i have only to borrow and do nothing... It's good to be a banker.

It's even better to be a bond-issuing government.

how about the part where you get 30% of everyone's income, and the (sole) right to take it by force - yeah it's good to be a government. this is getting silly.

No. This is a fee the ECB takes out for storing the bank reserves. This does not create more money in the system.

That's backwards. Typically, reserves in excess of requirements pay a positive rate. Now, the ECB it taking a piece when you leave the money sitting around.

Are deflationary fears driving this?

It is tough to imagine much demand-driven growth in the developed/developing world given how quickly the birth rate is plunging.

Most of Europe is already below the 2.1 birth rate required for sustainable population numbers:

http://www.economist.com/news/international/21603024-why-shr...

Denmark has already been doing this 'experiment' since 2012[1] and unfortunately the bankers didn't jump on the streets shouting: money! credit! credit at cheap prices!

Time will tell, but the precedent isn't a good one.

[1] http://www.bankofengland.co.uk/research/Documents/ccbs/cew20...

How are negative interest rates implemented?

You charge for deposits made in the banks' accounts at the ECB.

You give me money. In return, I promise to give you less money back in the future.

Isn't it more like you give me money, and for that privilege you shall now have to pay me more money for as long as I have your money?

That's a distinction without a difference.

But they also provide a level of security that nothing else can offer for that currency. They literally can print more money if they don't have enough to pay you back.

The commercial banks deposit their money in the central bank. Normally, the central bank pays (usually quite minimal) interest to the commercial banks for that money. With negative interest rates, the banks' deposits in the central bank start loosing value, i.e. the banks must "pay" the central bank a premium for holding their money.

The desired effect of negative interest rates is that commercial banks more readily give out loans to businesses, rather than just keeping their reserves idle, as the potential returns from successful lending are better. The idea is to inject more money in circulation and stimulate economic growth.

Why do the commerical banks store it with the central bank? Why not store it themselves?

Because at billion-dollar scale even 0.1% is better than 0%.

Not if it's -0.1%.

One of the reasons is the mandatory minimum reserve. Check this http://www.ecb.europa.eu/mopo/implement/mr/html/index.en.htm... I remembered that reserve existed but I'm a noob at finance so I'm pretty sure there are more important reasons.

AFAIK, in modern fractional reserve banking the commercial banks enjoy a special privilege for the balance that they hold at their central bank account. The balance at each bank's account is called its reserve, and for every euro the bank holds in reserve, it can actually lend out a far greater sum. Currently, for each euro at its central bank account, a commercial bank can lend out €100 to their clients (borrowers). (Interestingly, this extra money that the bank lends out materializes out of thin air.) So, the banks still have a great incentive to keep their money at their central bank account, because it's the only account that adds to their fractional reserve base.

I don't think so: banks are capital constrained, not reserve constrained. There's other types of money that make up their capital base as well as central bank reserves.

Because the alternatives is basically to store reserves at the central bank or to store them in cash, and storing in cash is costly.

The reason for this is that banks within a banking regulation/currency area is a closed system - reserves are created when a loan is made, and cannot be removed from the system until that debt is repaid. A bank can store it in actual cash or in reserves in another bank, but that would simply move the problem to that bank. They need to be able to store their reserves, and they end up doing that at the central bank.

In my experience the best way to answer this question is by asking a different question: How do bank transfers work? That is, when you, as a regular person, transfer money electronically from your account to somebody else's, what's actually happening on a technical level?

Obviously, both banks that are involved adjust their databases to reflect the change in balances. But now your bank owes you less, and the other person's bank owes their customer more. This is only fair if some form of settlement occurs between the banks.

In principle, this settlement could happen in cash, but that would be extraordinarily wasteful (because of the overhead of handling cash). You really want some form of electronic settlement.

As a first approximation, the electronic inter-bank-settlement works by all banks having an account at the central bank, and transactions at the consumer level are reflected by corresponding transactions at the level of central bank accounts. (Obviously, reality is more complicated both because it makes sense to aggregate lots of small transactions into a few bigger ones, and because the whole system has grown organically without anybody designing it from first principles.)

Isn't the central bank the lender in this case?

It sounds like the idea here is the ECB will loan money to banks at negative interest as long as those funds are loaned out to certain types of borrowers.

No, the central bank is the borrower (or depository).

Good way to keep resources locked up in zombie companies unable to generate even 0% return, by letting them roll over loans despite destroying value.

Instead of flushing out the stagnant resource pools, so they could be put to better use doing something less wasteful.

Moving from being a investment strategist to a startup founder next week, here are the thoughts on all of this sent to clients earlier..

"As widely expected the ECB has moved to negative deposit rates in the latest attempt to look useful.

We haven’t seen this happen in many places, but aside from Switzerland, which is always a bit odd, one of the more interesting instances was Denmark back in 2010 when the DKK peg to the Euro was under pressure as investors bailed on the EU. The result of this move was telling, in that rather than forcing the banks to lend more to mobilise reserves, Danish banks took a kicking on margin expansion and lending collapsed even as deposit flight occurred. It did stabilise the DKK exchange rate though, allowing it to depreciate gently.

I think a similar motive is behind this move, primarily to help out Germany where disinflation is very much in place and the surprising strength of the Euro, which I noted last year was due to its assumption of old-Yen like qualities, particularly at a time of taper tantrums, is starting to drag on exports.

It will be interesting to see what happens here even as Spain and Ireland enjoy their ability to borrow money even more cheaply than the US (really, check the 5 year). My feeling is that it will be difficult to actually devalue the Euro significant from here, particularly as the Eurozone as a whole has moved into an export surplus as peripheral deficits have collapsed on falling demand, offsetting the German surplus handily. A fall in the recently recovering M3 is also likely and the lower-for-much-longer policy of the ECB will look particularly attractive on the fixed income side for those wondering if the recent rally in US bond yields is likely to reverse - duration in bunds looks less painful than in US govvies. Money market funds also look quite weird in this environment, with 800bn Euros or so in these vehicles about to break the buck with German 2yr paper still positive.. For now..

As such, I think the Euro may well continue to strengthen after a bit more downside, thus weakening the dollar, EU bank lending will roll over further along with margins and economic malaise is likely to filter into Germany as macroeconomic imbalances extend and disinflation continues, particularly if my negative view on energy prices is correct."

Being a practical guy, I wonder if banks' accounting systems can cope with negative interest rates.

Makes perfect sense: To combat a crisis which was caused by an overabundance of cheap money and a deregulated market we will put more money into the system and continue deregulating.

"Insanity is doing the same thing over and over again, but expecting different results."

Why do people say this? This is not the definition of insanity. It is the definition of stupidity. Insanity is something very different, and the quote doesn't make sense with it. It should be 'Stupidity is doing the same thing over and over again, but expecting different results.'

I guess it's in the eye of the beholder. Like so many things in life.

What about measuring the state of a qubit?

That's a very good point indeed!

Actually, this is not what is happening here. A negative interest rate for central bank deposits means that instead of the central bank paying money to commercial banks, commercial banks are now paying the central bank. So if anything, this is taking money out of the system.

Overall, it's unlikely to change much at all.

Push the string harder!

Lol. Not quite accurate but a fair criticism. Note that in the US after the GFC there were deficit spending to stimulate the economy that helped create the Tea Party. In Europe there were instead austerity measures which helped to radicalize the population with a surge in right wing politics. In 2014 the US economy is growing, deficits are falling and the Tea Party is fading. In Europe sadly the economy is stalling and the risks of political unrest increasing leading to unique measures like the one in the article. It was sad to see the Europeans make these mistakes given what history has taught us.

Are banks required to have deposits on hand at ECB? Isn't hoarding physical cash preferable to a negative interest rate?

I doubt banks can store physical cash for (much) cheaper than .1% per year. $1MM takes up 40 cubic feet and weighs more than a ton, you think you can securely store that for less than $1000 a year? I'd say maybe, but not by much. Then there's the initial transport costs which have to be amortized.

Edit: I misread my wiki.answers.com link. That's the volume and weight for $1MM in singles, not hundreds. The costs start to look a lot more plausible, especially given that there are 500 Euro notes.

These people [1] have shown that you can store $1M inside a microwave with room to spare. $100M fits on a shipping pallet.

No doubt that physical money storage has associated costs. -0.1%/yr isn't enough to get someone to start storing money, but -1%/yr probably is.

[1] http://www.cockeyed.com/inside/million/million_dollars.html

There isn't enough cash to do that.

Quoting http://www.ecb.europa.eu/stats/money/aggregates/aggr/html/in... (tab Background) "M1 is the sum of currency in circulation and overnight deposits;". From http://sdw.ecb.europa.eu/reports.do?node=1000003478 on April 2014 we had M1 = 5,498.8 billions Euro

Banknote circulation data at http://www.ecb.europa.eu/stats/euro/circulation/html/index.e...

Banknotes: 948 billions Euro Coins: 24 billions Euro (*)

That's not the bank's problem, though, it would be the ECB's problem if banks decided to hoard.

Holding, and distibuting, physical cash is madly expensive.

I'm glad they are doing something but I worry it might be too little too late.

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