The Corner

Fun With Negative Interest Rates

In a post the other day I noted a report on an increase in demand for safes in Germany. Now (via Bloomberg News) there’s this:

It’s a sign the world is getting used to negative interest rates when what once seemed bizarre starts looking like the norm. Consider Switzerland, where more and more companies are taking out insurance policies to protect their cash hoards from theft or damage….

…The Swiss National Bank imposed sub-zero rates in early 2015, effectively charging banks for excess deposits. Many lenders including UBS Group AG and Credit Suisse Group AG have passed on at least some of the burden — they don’t disclose how much — to cash-rich clients like asset managers and big companies…

Helvetia Holding AG said it charges about 1,000 francs ($1,020) a year to insure 1 million francs, a fraction of the 7,500 francs a company would pay to park the same amount in a bank for a year — assuming the lender passes on the full charge. But that amount doesn’t include the cost of logistics such as transport or security features like reinforced walls, guards and alarm systems.

Companies need to save a lot on bank fees for cash storage to be economical because, in addition to insurance, they have to assume the costs of managing the money, said Roberto Brunazzi, a spokesman for Baloise Holding AG. He said the company has long offered such coverage “but there has been a noticeable increase and now it’s becoming more commonplace.”

Switzerland’s continued use of high-denomination banknotes adds to the appeal of self-storage: About 1 million francs worth of 1,000-franc bills can fit in a small box.

The SNB’s rate applies to sight deposits — cash that commercial banks hold at the central bank — that exceed 20 times a bank’s required minimum, an amount set by the SNB and that varies from lender to lender. Private banks, which have lower thresholds because they are less active in lending, exceeded their exemption limit almost from the start. For other bank categories, deposits stayed either under or just above the threshold for much of last year.

This year, though, the levels have jumped, prompting some banks to warn that they may one day have to charge ordinary savers — not just big customers — for liquidity.

The consequences of ultra-low/negative rates are piling up, whether it’s the effective ‘tax’ on savers, asset price inflation, mispriced risk, or, doubtless, unknown unknowns of the more unpleasant kind. To repeat what I wrote in that earlier post, I cannot see this ending very well. 

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