Kevin Bae

Non-Social in a Socially Networked World

Europe’s negative interest rates??

I don’t think I’ll ever understand negative interest rates. Europe has had them for almost a decade and I wonder when that crazy policy will make it’s way to the United States.

Germany’s biggest lenders, Deutsche Bank AG DB +2.19% and Commerzbank AG CRZBY 0.84% , have told new customers since last year to pay a 0.5% annual rate to keep large sums of money with them. The banks say they can no longer absorb the negative interest rates the European Central Bank charges them. The more customer deposits banks have, the more they have to park with the central bank.

That is creating an unusual incentive, where banks that usually want deposits as an inexpensive form of financing, are essentially telling customers to go away. Banks are even providing new online tools to help customers take their deposits elsewhere.

Wall Street Journal

This policy is causing individuals to use multiple banks to stay under the threshold where the banks start charging them to hold their money.

Alex Bierhaus, a managing director at a fintech company in Düsseldorf, received a letter from his bank, a unit of Commerzbank, last year saying it was going to start charging a 0.5% interest on deposits above €100,000, equivalent to $121,000.

To avoid paying, Mr. Bierhaus, whose savings ballooned without trips to restaurants and vacations, shifted some €60,000 to a bank in Italy and one in Sweden through an online platform called Raisin, which allows customers to shop for better rates at banks across Europe.

Mr. Bierhaus can’t even remember the name of his new banks but said he felt comfortable given that Europe has domestic guarantees on all deposits up to €100,000. He is receiving 0.8% interest on the one-year fixed deposits, similar to a certificate of deposit.

Wall Street Journal

As I understand things the European Central Bank (ECB) is much like the Federal Reserve in the United States. Therefore, the ECB controls the money supply. Why then do they charge member banks to store cash? They don’t want any cash out of circulation? Do negative interest rates force people to spend more of their money? This is not how human nature works… especially during hard or uncertain times. This pandemic being one of them.

In this day and age when most transactions are electronic how does it make sense to charge people for holding their cash when they need to pay using a debit card? What is the game here?

Is it impossible to have an old fashioned savings and loan? Back in the old days a bank would take a depositor’s money and promise a set interest rate. The bank would then use those funds to loan out to other customers at a rate higher than the depositor’s rate. The bank would then take the difference as their profit for facilitating and guaranteeing the loan. I realize this is a simplistic view because of all the rules and regulations that are in between this.

These are things I don’t think I’ll ever understand. Much like I will never understand the stock market and why people are willing to bet on companies that are not financially sound, have debts that far outweigh their income, and may not be profitable for decades… if they survive.

Image by Hans Braxmeier from Pixabay