This page has been archived and commenting is disabled.
Why Europe Is About To Plunge Further Into The NIRP Twilight Zone, And What It Means For Depositors
In some respects, today’s ECB presser was a snoozer. Reporters asked the same old questions (some of which we've been asking for years) and, more importantly, there were no glitter attacks.
Our ears did perk up however, when Mario Draghi admitted that, unlike the governing council’s last meeting, cutting the depo rate further into negative territory was indeed discussed.
This is significant for a number of reasons. At the general level, it shows that DM central bankers are ready and willing to plunge the world further into the Keynesian Twilight Zone. As we outlined last month, this means the Riksbank and the SNB are now on watch. If the ECB cuts again, the Riksbank will be forced to act as well and as Barclays recently opined, the SNB may be compelled to go nuclear on depositors, as removing the negative rate exemption for domestic banks would force them to pass along the “cost” to customers:
“In contrast, a cut in the ECB’s deposit rate further into negative territory likely would have a significant impact on the EURCHF exchange rate and provoke a more immediate response from the SNB. Indeed, we expect that a cut in the ECB’s deposit rate may have a greater effect on EURCHF than on other EUR crosses. Switzerland applies its negative deposit rate to only a fraction of reserves, currently about 1/3rd of sight deposits by our calculation. In contrast, negative deposit rates apply to all reserves held at the ECB, Riksbank and Denmark’s Nationalbank. Consequently, a cut to the ECB’s deposit rate likely has a larger impact both on the economy and on the exchange rate than a proportionate cut by the SNB. An SNB response to an ECB deposit rate cut could take one of two forms: 1) a further cut in its deposit rate and CHF Libor target range; or 2) the ‘nuclear’ option, removing all exemptions from the negative deposit rate. We think the latter is more likely and would have major implications for EURCHF." Most retail (private) depositors at domestic Swiss banks still do not face negative interest rates, but we would expect that to change if the SNB removed exemptions of domestic banks on sight deposits at the SNB. A removal of domestic banks’ exemption from negative deposit rates likely would force Swiss banks to pass on negative deposit rates as it would increase the proportion of assets charged negative rates to over 20%.
This is an important concept not only for what it says about the never-ending, tit-for-tat, beggar- thy-neighbor monetary policies that now pervade developed markets, but also for the degree to which it explains why NIRP has not yet led to a sharp increase in the demand for physical banknotes. Put simply: depositors haven’t yet felt the effects of the monetary insanity engendered by the global currency wars.
Deutsche Bank’s Abhishek Singhania and Oliver Harvey have taken a close look at the proliferation of NIRP at the Riksbank, the SNB, the Nationalbank, and the ECB on the way to positing that not only is zero not the lower bound, but in fact no one has hit the lower limit for rates as of yet.
First, there’s the obvious problem with negative rates. Namely, depositors will just take it to the mattresses (so to speak):
The main concern with further cuts to policy rates is the problem of the zero lower bound. In academic literature, the challenge for central banks operating near or at zero interest rates is that it is technically unfeasible to impose interest rates on cash. Depositors charged at negative rates can simply exchange electronic reserves into paper currency.
Of course because fractional reserve banking is nothing more than a giant ponzi scheme wherein banks are perpetually borrowing short to lend long, instituting a rate negative enough to trigger a run on deposits would have the exact opposite effect from what central banks intended. That is, banks would be forced to sell assets to meet the outflows:
As well as losing control over monetary policy, central banks would see financial conditions tighten as banks were forced to sell assets to meet depositor withdrawals. In extremis, the effect could be compared to a bank-run preceding capital controls or large scale currency devaluation. However, due to the more incremental nature of the impact of negative rates (e.g. 25bp charge on deposit holdings rather than a multi percent devaluation), interest rates would need to be slashed deeply negative for depositor withdrawals to resemble much more than a jog.
Obviously, if rates go negative enough to trigger a run that (literally) breaks the banks, then the lower limit will definitively have been reached, but at that point it will be too late. Back to Deutsche Bank:
So far, the experiences of the four European economies under negative interest rates, including the Eurozone, suggest that this theoretical constraint has not been reached. The demand for coins and notes has ticked up slightly in recent months, but remains at fairly muted levels.
Why the lower bound constraint has yet to be reached, and how much more room there is to maneuver, is obviously crucial for the ECB and the three other central banks imposing negative rates. The main reason is that banks have not passed on negative policy rates to depositors. In none of the four economies are household deposit rates in negative territory, either for outstanding balances or new business. Why have negative nominal rates not passed through to depositors?
Banks are of course hesitant to charge depositors for deposits for fear of damaging relationships. Or, in Deutsche Bank’s more condescending parlance, “banks are very reluctant to pass on negative rates to households [because] retail depositors [are] least likely to understand the wider monetary policy context behind such a decision.” Right, they aren’t likely to understand why they should have to pay the bank to lend out their money at a spread that nets the bank a profit and the reason they aren’t likely to understand it is because, frankly, it makes absolutely no sense.
But the bank has to preserve its margins. With long-end rates falling on the asset side thanks to unconventional monetary policy, you either have to pass that along by reducing the rate you pay on your liabilities (i.e. deposits) or else your margins are going to get pinched - unless you find some other way to make up the difference, that is.
The indirect cost of negative rates for banks is through margins. In theory, as unconventional monetary policy pushes down yields on the asset side of the balance sheet, banks need to cut rates on the liability side to preserve margins. As banks are reluctant to cut deposit rates into negative territory for the reasons above, their net interest margin may suffer.
Right. So what’s the solution if it's not passing along NIRP to depositors?
The SNB have noted that the consequence of introducing negative rates earlier this year was rising, not falling, mortgage rates as banks sought to protect falling liability margins by raising long-end rates. In a similar vein, Danish banks appeared to raise administration fees on new mortgages after rates first turned negative back in 2012. An analysis of long-end mortgage rates offered by banks across Sweden, Denmark and Switzerland suggests that at the long-end, rates have actually risen since the introduction of negative interest rates.
Got that? NIRP is paradoxically causing mortgage rates to rise because banks fear a depositor backlash from negative rates. So, this is yet another example of the unintended consequences of unconventional monetary policy.
We saw something akin to this in Sweden back in July when the Riksbank had sucked up so much high quality collateral via QE that the liquidity premium demanded by investors ended up pushing yields on 10-year govies higher in what amounted to the exact opposite of what the central bank intended.
Note once again that there's no end to this. If the ECB cuts the depo rate further, then other NIRP countries will have to respond. If they don't, their currencies will soar, threatening inflation targets. Case in point, from this morning:
This means going deeper into NIRP, which, in light of the above, means rising borrowing costs right up until the breaking point when the hit to margins can no longer be offset. At that juncture, NIRP will have to be passed on to depositors lest NIM should simply flatline.
What happens next is anyone's guess but if depositors revolt and begin asking for their money back, banks' maturity mismatched business model means there are only three available options, i) sell assets to meet withdrawals, ii) institute capital controls, or iii) ban cash. Welcome to the future.
»
- 25375 reads
- Printer-friendly version
- Send to friend
- advertisements -
Run away!
Deposits who needs deposits they'll get promise deposits from EU member states and then lever up on that
"That is, banks would be forced to sell assets to meet the outflows:"
Really? or would they just conjure it from the ether, thanks Janet!
The depths of negative rates…ha, we haven’t seen the beginning of it. Wait till they ban cash or implement the E dollar, rates will go significantly negative. It will only result in super bubbles but it’s the only way the powers that be can see themselves getting out of this mess.
And one would assume that the banning of cash would imply that attempting to horde cash would be useless and counterproductive. It sounds like we are well boxed in.
Can you say...
ZIM-ZIM-Zim-babwe....
Y'all best getchur bonds (or other income producing assets) with honest to good positive cash flows (interest rates) while you can.
Have a small global account with Schwab and just got a notice. As of Nov. they reserve the right to begin passing along costs associated with negative interest rates to clients holding Euros. This is just the beginning as negative rates and cashless society goes global. Expect physical pm's to become as scarce as hens teeth and bitcoin to get another look see. We are indeed in the end game now.
That must be the answer. It's over. Whatever that means -- I guess we'll be finding out.
Watch the calls for free heroin etc. Can't have casless society in the drugmarkets can we?
Square.
https://squareup.com/?gclid=CPnIje6z2MgCFdCQHwod36YNNg&pcrid=45554465377...
If NIRP gets messy capital controls will be first. When that's not enough it will be the banning of cash in your pocket. There is no hope of selling assets to meet withdrawals because this would cause financial implosion of .gov, banks and everyone else. I don't think this will be allowed to happen until it can't be stopped. Like before in history, it will literally take people standing in lines outside banks demanding their money for the system to actually collapse. Until then rainbow unicorn economics continue as usual.
When the 2008 collapse happened, it was electronic transfers that were imploding the system, not people standing in line.
While I'm normally quite skeptical of anything coming from the government, I think their claims (a year + after the fact) that the system had at best hours left were probably valid. Had they not extended the FDIC insurance to 250K that day, I'm pretty sure we really would have had the collapse and not have had to endure the unending stream of central bank bullshit we've had since.
So, I'd argue, when the system does collapse there won't be anyone standing line. More likely they'll wake up one day to the news that it's all gone and a bunch of politicians will try to spring global socialism and god knows what else on us.
All as a resultof a crisis that they could have never seen coming, and requiring drastic "life saving actions" that will change the very world we live in....and not for the better you can bet.
If we only could have known beforehand
WHY IS GOD SO CRUEL
NIRP just seems desperate to me. They are about to burn through the last shreds of banking sector credibility they retain ... for what exactly? To scare a few $billions held in savings into cash instruments? And failing that to jank some thin dime of profit from accounts until someone notices?
I understand the motive to get at money for nothing, but it's not like there is no risk in doing so. I imagine the risk is really high, even really huge.
Desperate, yeah. Makes me wonder what it is they see coming.
They see the end coming. NIRP isn't about saving the system, it's about buying time. Practically everything done since '08 has been about buying time.
Agreement on that. They've known the truth all along.
Nero fiddled while Rome burned to hide his agony for the Empire's loss.
They want to hold onto power just a little bit longer. It's human nature.
Simple... NIRP=FUCKED
So, yeah....great. We'll get the shitty end of the stick (negative rates on our "savings"), then jabbed in the eye with the clean end of the stick (higher rates on our debts)
This kinda shit is what's gonna provide job security for rope and lamp post manufactures.
+100 for This kinda shit is what's gonna provide job security for rope and lamp post manufactures.........because thats what it fucking boils down to - if we want to end the fucking insanity that is.
So at moment of hypothecation, the creators of credit as money get to tax us with interest. Bankers get our interest upon our signature authority, to add insult to injury.
Then the transaction money supply has to use this draining sort of money as we all compete to grab it back, to then pay off our debts. This makes mankind run on a false treadmill.
Then the credit, once we grab it back through working and slaving, gets thrown to the banker and he gets to pocket a consideable fraction. A home loan could have interest at double or triple the principle. This usury is paid up front, so banker gets it as seigniorage.
Then, since too many people are hoarding the very same bank credit they created upon signature hypothecation, the bankers want to tax it again.
Negative rates on savings, to thus not hoard, make it a double tax.
Negative rates at moment of hypothecation are not going to happen. That is not banker intents. They are trying to unlock non velocity money sitting on sidelines, especially in entrepot money centers, like the Cayman's.
Credit as money was hypothecated, especially against housing, which put a debt hook in the mouth of labor. This credit then got spent into money supply, drained out through banks (see above where it pays banker first), then it passes through banks to an upper loop of finance.
There it seeks out more gains, or leaves and goes overseas - especially dollars since they can be spent worldwide.
Debts are now lodged among labor, and they cannot buy their output. Dollars formerly hypothecated are now in another loop of finance and waiting for good returns, trying to buy up anything that may make some gains.
Is it too much for humanity to even concede that money properly understood is law, and that it belongs to the commons?
Private corporations making gains on what properly are the commons is high cost and directs society in directions it should not go. It turns people into rats biting on their fellow humans as they are desperately looking for money, as everything is monetized.
Well said.
Importing all those poor muslim "refugees" will fix everything
Didn't it work in Sweden?
Fail already!
Globalist have installed the radical Islamic Trojan horse so it's destroyed from within. Just a matter of time now.
This is a great deal, because I can be down 2% with my money in savings, or -20% in stocks! Punish me, please!
/s
Shit-for-brains economists have outdone themselves with NIRP.
It's an instant wage cut for everyone who gets paid via electronic bank deposit. More poverty. Fabulous.
Nothing spells REKOVERY like the banks stealing from the poor and middle-class.
I pray to God that banks like HSBC try NIRP on their BFF clients like the Sinaloa cartel, Sicilian mafia, Al Qaeda, Al Nusra, and ISIS. Because nothing will be more entertaining, at this point, than bankers' blood running in the streets.
Those BFF clients are most definitely "least likely to understand the wider monetary policy context behind such a decision."
Does this whole shitstorm finally conclude when they charge 1.01 for every 1.00 deposited?
and helicopter money to PAY the banksters for taking ALL of our savings.
Hey Mario,
You have totally convinced me that your are insane, so here is my suggestion:
Impose a combination of negative interest rates on bank deposits plus a limit on what cash can be withdrawn every week like they do in Greece.
The only option people will then have is to SPEND SPEND SPEND and obviously ONLY by credit card.
By the way, you have shit for brains.
Yep. And the fact is that NIRP is coming to the USA. Probably early next year, as the economy continues to slow. And then "QE for the people" rather than the banks as every one of the FOMC voting members is an Obama appointee. It will be a debt jubilee in Obama's last year in office. I can't wait to refi my two mortgages at a one handle rate for 30 years. This will be the chance of a lifetime.
Keep us updated.
Faceplant should still be there.
All the while the criminal activity continues. So all this is done to keep the Ponzi going not for the depositors, but for the banksters and criminals. The are "cashing out" so to speak, and screw everybody else.