The banks began pushing back earlier in the week, led, surprisingly, by the Bank for International Settlements (BIS). Negative rates hurt back profitability and increase the risk of a run on banks by depositors, the BIS said in so many words in its quarterly report. Here are the actual words (emphasis added is mine):
The Swiss experience [of negative rates] points to a fundamental policy tension if the intention of negative policy rates is to transmit negative interest rates to the wider economy. If negative policy rates do not feed into lending rates for households and firms, they largely lose their rationale. On the other hand, if negative policy rates are transmitted to lending rates for firms and households, then there will be knock-on effects on bank profitability unless negative rates are also imposed on deposits, raising questions as to the stability of the retail deposit base. In either case, the viability of banks’ business model as financial intermediaries may be brought into question. The dilemma is less acute if the objective is to influence the exchange rate. In this case, however, other thorny issues arise, not least that of cross-border spill overs.
This is a point you’ve seen made before
Swiss, Swedish, and Danish negative rates are “good” because their goal is to weaken capital flows into a country, which weakens its currency, which makes its exports more competitive, which is a measurable and achievable economic goal.
Negative rates from the ECB and Japan are bad (and ineffective) because they aren’t doing what they say on the tin: causing inflation to rise by incentivising savers to spend and lenders to lend. And while not accomplishing their stated goal, they ARE eroding bank profitability/stability, as long as banks don’t pass on the negative rates to depositors (which they don’t want to do, lest it cause a bank run).
The negative interest rate theory, then, has run into the brick wall of reality. And the fight back from the banks is a new twist. The central bank is supposed to provide liquidity and be the lender of the last resort. It is not supposed to be a task master that ruins the business model, unleashes a tidal wave of cash and undermines the confidence of savers.
Yet here we are, banging our head against the same table. Next up for bad ideas? Helicopter money and the war on cash.
Category: Central Banks