Banks Ponder Vault Cash In Response To Negative Rates: Lending Reality In A Nutshell

Tyler Durden's picture

Submitted by Michael Shedlock via MishTalk.com,

Under guise of preventing fraud the ECB voted to kill the €500 note.

Fraud was not the real reason. The real reason was to make it more difficult for banks to store physical cash to avoid negative interest penalties... but it's not working.

Cash Under the Mattress

Cash in Mattress

Please consider Banks Seek Cheap Way to Store Cash Piles as Rates Go Negative.

The idea of keeping piles of cash in high security vaults may sound like something from an old movie plot, but some banks and insurers have recently started considering the idea as interest rates sink below zero across much of Europe.

 

After the European Central Bank’s most recent rate cut in March, private-sector banks are paying what amounts to an annual levy of 0.4 per cent on most of the funds they keep at the eurozone’s 19 national central banks. This policy, which has cost banks around €2.64bn since ECB rates became negative in 2014, is intended to spark economic growth by giving banks the incentive to lend money out to businesses instead of holding on to it.

 

European central bankers say they could cut rates again should economic conditions worsen, but private bankers and insurers are already thinking of creative ways to avoid those charges altogether.

 

One way is by turning the electronic money they keep at central banks into cold, hard cash. Munich Re has experimented successfully with storing a double-digit million sum of euros in cash at what the insurer describes as a manageable cost. A few other German banks, including Commerzbank, the country’s second-biggest lender, have also considered taking the step. But when a Swiss pension fund attempted to withdraw a large sum of money from its bank in order to store it in a vault, the bank refused to provide the cash, according to local media reports.

 

If this practice becomes widespread, it would have big economic implications. If banks are not paying central bank interest charges, then they will not be as affected by further official interest rate cuts. They therefore would not be spurred to lend out more money.

Lending Reality

  1. Lending is a function of the willingness and ability of banks to lend, and the willingness of creditworthy (or deemed by the bank as creditworthy) borrowers to take on loans. Banks can make mistakes in regards to credit worthiness as they did in the housing bubble, but if banks believe they will be paid back (or bailed out by rising asset prices), enough to compensate for the risk of lending, they will lend.
  2. Capital impaired banks cannot or will not lend, regardless of what stress tests show.
  3. It is impossible for banks to lend excess reserves in a way that reduces excess reserves except to another bank that is short of reserves and needs them. Otherwise, loans just get redeposited somewhere. It’s the size of central bank balance sheets that has created the massive pile of excess reserves.
  4. If banks aren’t lending, they are either capital impaired or they do not have creditworthy customers willing to borrow.
  5. Negative interest rates add to banks expenses, eating at bank profits, making them less likely to lend.

Counterproductive Central Bank Actions

It’s a mystery why central banks think making banks more unprofitable will spur lending, especially when excess reserves cannot be lent. To top it off, Low interest rates punish savers who have less money to spend than they would have at higher interest rates.

For further discussion please see Self-Defeating Central Bank Interest Rate Policies.

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HedgeAccordingly's picture

Very interesting. Makes sense she frankly believe cash is going to become envouge soon. Hip in a way. Sweden moving away from cash

Polemos's picture

Negative interest rates on money owned imply the entire system's decoherence.

Midas's picture

How long until the geniuses consider buying precious metals?

Boris Alatovkrap's picture

Soon, day will come when every bankster is look out for self and is quick flee Bank-o-sphere of soft asset in pursuit of hard asset. That is day of reckoning as asset price is drop while value of everything else is decouple. Is never happen before on global scale, so be prepare for ANYTHING. Remember, all war is bankster war, so that is likely outcome.

…meh, but what is Boris know!?

brushhog's picture

Prepare for everything is same as prepare for nothing...better to live and not make worry

Meh, what does Brushhog know?

Mustafa Kemal's picture

Boris know alot. He not full of alotovkrap.

Boris Alatovkrap's picture

Boris younger sister, Nada, she is study economic at elite university in Moscow. She is never marry, and is many feline pet in apartment. She is very prestigious professor and is own apartment with free WiFi and grand view of Gorky Park! Maybe you are, how you say, "hook up"?

Polemos's picture

All the gold mined throughout history still exists. It forms an aboveground stock weighing about 170,000 tonnes. http://www.zerohedge.com/news/2016-05-26/gold-commodity

170,000 t =  170,000,000 kg =  170,000,000,000 g.

So, mankind has 170 billion grams of gold, or 22 grams of gold per one human being.

That is why it is physically impossible to have a gold-backed currency any more.

Hoarding gold is risky. It is quite probable that all your gold will be confiscated either by the government or by robbers.

CHX's picture

A true gold standard does not work long-term, but the future price of (fizzical) gold - real money - may be high enough for fiat currencies to be considered defacto backed by gold. There is always "enough gold", it's just a matter of the fiat/gold conversion rate ("price"). AND, currently about 250 tons of gold are used up by industry every year, so the correct statement should be that a vast majority of all gold ever mined is still around. Some gold also got lost in tragic boat accidents.

holgerdanske's picture

Of course a gold standard does work long time. But it forces the politicians to toe the line, and spend only what is created by economic activities. IOW to live within their and our means.

That does not work long time, as they can't pay for votes, and enrich themselves in the process!

Don't confuse the two.

CHX's picture

Agree completely, but the two issues are in reality interlinked. If we went to a hard gold standard (say at [insert big number]$/ounce) we'd likely face societal and economic collapse of epic proportions as the gubbermints, banks, pension funds etc could not live up to their promises. For now it's extend and pretend, but the day of reckong draws closer.

Polemos's picture

CHX: "the future price of (fizzical) gold - real money - may be high enough for fiat currencies to be considered defacto backed by gold. There is always "enough gold", it's just a matter of the fiat/gold conversion rate ("price")."

By your logic, all modern fiat currencies are backed by gold.

In reality, a gold-backed currency is a gold-anchored currency, which implies that the currency/gold conversion rate is constant. A fiat currency whose supply doubles every few weeks can still buy some gold. But rather than being gold-anchored, such a currency is in a freefall.

CHX's picture

"By your logic, all modern fiat currencies are backed by gold."

 

Sorry, you're putting words in my mouth. Right now this is certainly not the case and I specifically said de facto backed, not backed (with a constant exchange rate - which is not stable longterm and hence not desired). The later is not stable longterm and thus I do not think this will ever happen in this way. In addition, there are different kinds of "gold standard". A CB could decide to have say 10 or 20% of their fiat "assets" on their balance sheet in fizzical gold, in which case it would be a partial backing, still allowing floating fiat and gold exchange rates. T I said it here before not long ago, I think gold is at or near a significan bottom if valued in total golbal debt. Gold could be revalued to cover all these debts (good and bad), but this is a pure speculation by me. ime will tell how it all pans out, and apart from a few insiders we don't know their plans for sure. And whether what they want also will work is another question as lunics and psycopaths are steering the Titanic.

 

As for your second part, of course! Ultimately all fiat currencies will collapse vis-a-vis real money, which is just different words for saying the same I did - gold is greatly undervalued.

 

Polemos's picture

A banknote is a promissory note--a unit of trust. When a currency is only partially backed by gold, the trustworthiness of the currency is mostly circular (self-referential) and thus more fragile, just as the dynamic equilibrium of a two-wheeled bicycle is more fragile than the static equilibrium of a four-wheeled car.

CHX's picture

Let me ask you this. If there is a hard gold standard (say N$ per ounce), where does the gold come from when new loans by banks are made (increase in the size of fiat money)? Where does the gold for the interest of these loans come from ?? IMHO this is why a hard gold standard does not work. BUT gold as THE store of value will do the trick and CBs will ultimately buy back their leased out gold at much higher prices. Time will tell as none of us outsiders have a clear idea of how and when this currency crisis will unfold. But unfold it will and when it does the price of gold will not trade up, it will gap up (possibly by many multiples) as forex exchanges (AUX, AGX), LBMA, CONeX et all will be closed during a bank holiday.

Polemos's picture

"If there is a hard gold standard (say N$ per ounce), where does the gold come from when new loans by banks are made (increase in the size of fiat money)? Where does the gold for the interest of these loans come from ??"

The additional gold was coming from gold mines. But the output of gold mines eventually became insufficient. That is why a gold-backed currency is no longer possible.

Davy Crockett's picture

which implies that the currency/gold conversion rate is constant

Why would it be constant?  That would be stupid.  It's a forex market.  The currency/gold conversion rate will float as the supply of currency and the supply of gold change.  If your trade balance is negative, you lose gold to other countries, and you take steps to alter that trade balance until it's balanced.  Governments would live like you do.  As your expenses exceed your income, you reduce expenses or increase income.  You don't write an IOU in your grandchildrens name.

RaceToTheBottom's picture

"but the future price of (fizzical) gold - real money - may be high enough for fiat currencies to be considered defacto backed by gold."

WTF?

Does that mean that the fiat owners will voluntarily manage their finances prudently?  Baa....

Having something of value in a vault does not obligate you to treat your fictional money (fiat) more prudently....  

 

CoastalCowboy's picture

Good thing I lost all of mine after a rogue wave washed over my boat.  It was so tragic, but at least I don't have to worry about robbers anymore.

Davy Crockett's picture

So, mankind has 170 billion grams of gold, or 22 grams of gold per one human being.

That is why it is physically impossible to have a gold-backed currency any more.

That's not logic, that's just putting a random conclusion after a random fact.  Look, I can do it too.

So, mankind has two hands and two feet, for a total of 20 wiggly appendages per person 

That is why it is physically impossible for fingers to be wasted flipping people off.

It is obviously possible, both physically as well as morally, ethically, legally, and financially, to have a gold-backed currency.   We don't all have to trade physical pieces of metal.  We do, however, need a way to audit the reserves of the metal that a country claims to have.  

Polemos's picture

A banknote is a promissory note--a unit of trust. When a currency is only partially backed by gold, the trustworthiness of the currency is mostly circular (self-referential) and thus more fragile, just as the dynamic equilibrium of a two-wheeled bicycle is more fragile than the static equilibrium of a four-wheeled car.

Anopheles's picture

But as soon as interest rates go up, gold WILL plummet. 

The entire purpose of the article is for banks to avoid paying 0.4% interest on their own deposits.  Will you guarantee they won't lose money buying PMs? 

Lockesmith's picture

5 €200 notes weigh less than one ounce gold coin

FlipFlop's picture

Consider....if banks stop depositing reserves in CB and instead ask CB to deliver cash -> lots of new money gets printed....how long does it mKe sense to store paper. Where does this paper go eventually, does it get to broader circulation?

Insane...how do you go back to "normal" from here without collapsing all asset prices? Or do you just want to raise inflation such that nominal rate goes up, but rising inflation expectation compensates for asset price expectations?

Just thinking, I am confused.

Paul Kersey's picture

Cash is becoming harder and harder to spend. Governments don't like it, because it's too hard to track and confiscate. With digital money, entities like the IRS, for instance, can freeze your accounts in a nanosecond.

Still, the article makes little sense, because there isn't close to enough printed money to cover all the digital money that's created out of thin air, with little more than a keystroke. And nothing will stop the banks from lending, especially when they can borrow at zero percent of less, and lend it out in the form of credit cards and used car loans at fifteen to thirty percent. Even hard money lenders can't run a scam that good. Sometimes Mish's article aren't too well thought out.

HopefulCynic's picture

I like cash even if it is fiat, and until faith is gone I will keep liking it. I specially like Swiss Fr. bank notes, the 1000 ones specially, I love the 500 Euro ones as well. I wasn't around when there were $500 ones, I bet I would have loved them, the $100 ones meehhh, too small for my taste. 

I think that cash will be updated in one form, and will soon become more popular, specially since it is just a matter of time for a new crypto currency hype and fad, I just hope for bigger denominations, I like to carry a thin wallet. 

cossack55's picture

Beware of "C" days.  They arrive with NO notice.

tarabel's picture

 

 

Very interesting to watch a world on the edge of hyperinflation scrambling to retire all of its highest denomination bills before the smash-up comes.

Makes the Bank of Zimbabwe look like a bunch of financial Einsteins.

Verlorenes Geld's picture

One TRILLION [insert country code here] Dollars!

Here2Go's picture
Here2Go (not verified) tarabel Aug 18, 2016 1:42 AM

Hyperinflation would occur more due to a scarcity in finished goods, rather than as a vehicle to soak up excessive money printing.

 

Until there are worldwide shortages in food & fuel, there will not be hyperinflation (or, the only places you'll see it are in closed economies like Venezuela).

css1971's picture

No, it works anyway. There will still be an incentive to lend physical cash and it will increase the cash circulating. Cash can extinguish multiple debts where credit can only extinguish one.

Put another way. Cash is non deflationary.

Hobbleknee's picture

The headline should read: Banks Ponder Becoming Banks

CHX's picture

Get some/enough fizz cash (including au and/or ag) our of the financial system a.s.ap. to pre-run the bankrun that is in the making. There is simply not enough cash (any of the three forms) in existance, so this will not end happily. 

holgerdanske's picture

Well then we just get new notes, and the old ones will become good for wall paper only.

Gold somehow seems the only logical options, and more so for each passing day.

What would it require to see that his is a road to nowhere.

Paper money will always revert to it's intrinsic value, Zero.

buzzsaw99's picture

again mish gets it wrong. this line:

If banks are not paying central bank interest charges, then they will not be as affected by further official interest rate cuts.

demonstrates that he understands nothing.  he makes the same mistake so many others make on this issue.

Loocust's picture

One of the problems is that there is not enough cash in circulation to do this without having an impact on availability of cash.

  • 356 billion euro was stored at the ECB deposit facility (August 18)
  • 1,087 billion euro in circulation (June 2016)
sudzee's picture

Cash can be held as an uncashed cheque. No need for vaults. Counterparty ageements can be put in place among banks. Just  going back to late 1800's banking when failures were expected. No central bank just a bunch of elites defrauding eachother and depositors. Banks now frontrun almost every transaction on earth and C/B's are "owned " by and for banks. C/B's are there to keep competition out and subjigate governments to they're con game. I don't believe for a minute that banks actually pay for excess reserves. If they do it just comes back to them as dividend from C/B's.

 

acheron2016's picture

They should convert their paper to gold.  This has several advantages.  

  1. From a strictly practical standpoint it is more dense. Stealing (moving) many tons of gold out of the vault is a physically daunting task.
  2. Almost without exception gold appreciates - think of it like positive interest.
  3. Almost without exception fiat money depreciates.  Even at +2% interest anyone holding cash is losing purchasing power.  Compounded daily.
  4. The "Almost" in the above two points will be the "Absolute" for the long term.  There is no foreseeable economic development in which gold will lose value or fiat money will gain value (deflation).  Even the bizarre FX trend with the Yen is transitory.  The only thing it really signifies is that in the global race to Zero Value and Zero productive economic activity, the Japanese are currently in last place.

Contrast this with the only real down side is that (for now) gold is considerably less liquid.  There are messy exchange fees and time delays before one can normally use it for the exchange of goods and services.  But then that is the way of life.  Sometimes you have to accept the world is what it is, not the way you, or even a considerably more rational man, wish it was.  

golden raccoon's picture

"It is impossible for banks to lend excess reserves in a way that reduces excess reserves except to another bank that is short of reserves and needs them."

This is not true, in that the excess reserves could first be converted to vault cash (which would still count as excess reserves), and then the vault cash could be lent (to non-banks) into circulation, thus reducing excess reserves.  Even if no new lending occurs, excess reserves could decline if depositors demand new physical currency from the banks in exchange for their deposits.

rejected's picture

Central Banks are a scam of the first order. Most bankers are shysters anyway, but giving them the sole power to create money is handing them the keys to the country. The people in the u.s has always been gullible. but not putting their foot down in 1913 doomed the nation. Took them awhile, so as to not create too much panic,  but today they're showing their true criminal colors. Problem is they have infested higher education and government with their song making it almost impossible to pry them loose from power. 

Anyone that believes ZIRP, NIRP, QE, TWIST, and everything else are attempts at correcting problems in the economy are fools of the highest order. These are making more problems but, they are the way these thieves get control. More problems equate to more fixes equate to more power and your impoverishment. We have been witnessing small bail ins around the planet. These are test cases. Soon they will occur in the larger nations. 

This is an ongoing 6000 year war and the banks are finally positioned to win. When / If they do it will be mankind's darkest hour.

wide angle tree's picture

The lack of demand in the economy is not due to the lack of bank lending. It's due to the failure to reward workers that work with sufficient income. There is no better economic model than to pay workers to produce. The workers can then spend their income on what they want. There's no unhealthy need for bank loans at abnormally low interest rates. There's no unhealthy need for the government to go into debt to provide food and healthcare.

90% of the non food items I buy are Made in China. Probably virtual slavery.

SweetDoug's picture

'
'
'
So, if the morons in the banks think their CB counterparts will simply say…

"Oh! You turned the electronic money into 'paper money'?!? Guess you sneaked around that one!"

I've got news for you, Bub.

The money is on the balance sheets and they'll do it the old fashioned way, just like they USED to do.

Cash is cash.

The gates are closing behind everyone.

•?•
V-V

“Tell Vladimir I’ll have more leeway after the election.”

-----
NBC Poll: Only 11 Percent Think Hillary Is Honest and Trustworthy
http://www.breitbart.com/2016-presidential-race/2016/08/16/nbc-poll-11-p...
---------------------------------------------------------------------------------------------Tim Kaine Once Said Cheating Politicians Should Resign—Including Bill Clinton
http://www.thedailybeast.com/articles/2016/08/17/tim-kaine-once-said-che...
-----
If the Clintons cheated in the DNC, why wouldn't they in the General Election?

"To Ensure Her Election": Wasserman-Schultz Admits She Really Worked For Hillary While At DNC
http://www.zerohedge.com/news/2016-08-16/ensure-her-election-wasserman-s...
------
Ten Minutes of CNN Cutting Off People Who Dare Criticize Hillary
http://www.dailywire.com/news/8285/nine-minutes-cnn-cutting-guests-who-d...
------
Hillary Clinton vs. James Comey: Email Scandal Supercut
https://www.youtube.com/watch?v=wbkS26PX4rc
------

Hillary has had 30 years in office to do what she wanted, but needs more power to get 'more' done? What more possibly could she do, given her abysmal record of accomplishments else but personally enriching herself, further?

WHEN THE HELL IS SOMETHING GOING TO STICK TO THIS WOMAN?

Kirk2NCC1701's picture

For the sake of Compete Dilligence and Comparative Analysis, the Tylers/ZH or you private citizens need to...

Do the NIRP Analysis of Precious Metals (PM).  Given different amounts involved, be sure to include:

   1. TRANSACTION Costs (the Spread, i.e. Buy & Sell Margins paid in fiat currency at each transaction)

   2. TRANSPORT Costs (for Transport + Insurance)

   3. STORAGE Costs (Storage Fees + Insurance)

Use several scenarios, that involve different amounts involved.  E.g.

   > 2-1000 Troy Ounces (or metric equivalent) stored 'at home',

   > 10-1000 Oz stored in SD boxes at banks (domestic and foreign),

   > 100-10,000 kg (stored at secure facility - domestic or foreign).

The point that should be obvious, but is deliberately ignored on ZH, is that PM is a...

   a. Zero Yield Asset

   b. NIRP Asset

   c. Precious Commodity.  Profits and Losses are realized in the Buy/Sell of Bullion or Paper Gold. And like any Asset or Commidity, its fiat price is determined by an interplay of 3 factors:

       i.   Supply/Demand of Bullion

       ii.  GLD Speculation (Pump & Dump games by speculators)

       iii. Central Banker manipulation (Price oppression)

Only when you do the above analysis, and compare it to ZH's analysis of ZIRP and NIRP on Cash, or the (speculative) Investment in other Real or Paper Assets, can a smart and wise Investor make a rational and balanced decision.  All else is neither rational, nor balanced.