European banks are considering the unthinkable…”A radical alternative: “Impose controls on cash withdrawals.”

Saturday, October 24, 2015
By Paul Martin

Jim Edwards
BusinessInsider.com
Oct.24,2015

The concept of earning interest on money in the bank is so deeply ingrained into economic life that few people even know that the opposite can happen too: Banks can take a percentage of cash from your account in the form of negative interest rates, under certain conditions.

Normally, this doesn’t happen. Banks want your cash, and pay you interest on it, because the more deposits they have, the more they can lend it to others who pay them even more on their investments.

But interest rates in Europe are so close to zero — and economic activity is so sluggish — that some central bankers are seriously discussing whether they should drive interest rates into negative territory in the future, as a sort of economic punishment for not spending money. The theory is that if you are deterred from keeping cash in the bank you’ll withdraw it and spend some of it, thus creating economic growth.

Europe’s central banks and the US Federal Reserve have kept interest rates near zero for years now in the hopes of making money cheap to borrow. The intent is that because it costs next to nothing to borrow money, you’ll take advantage of that and invest it in anything that pays more than a 0% return. That usually creates inflation too, as the influx of cheap, new cash devalues the existing stock.

But inflation is nowhere to be seen. The price of oil has fallen dramatically, making anything that requires fuel cheaper. And with prices falling, people hold off on spending today because they know their money will be worth more tomorrow. That lack of economic activity despite the cheapness of lending is exactly what is holding the economy back.

‘We also expect the ECB to remove the lower bound, leaving the door open to go more negative.’

In an attempt to break this deadlock, four European central banks (the ECB, SNB, Riksbank, and Denmark’s Nationalbank) have already imposed negative “policy” interest rates. These are nominal negative rates they charge in their direct dealings with other banks. None of those negative rates have passed through into the consumer banking system — yet.

But now bankers are talking about whether it’s time to do just that, in order to force you to make cash withdrawals. In a note to investors this week, Credit Suisse analyst Christel Aranda-Hassel says she expects the European Central Bank to cut its “deposit rate” for banks even further into negative territory, from -0.2% to -0.3% in December. “Crucially, we also expect the ECB to remove the lower bound, leaving the door open to go more negative if needed,” she wrote.

With negative institutional lending rates forming a de facto tax on banks that store money with other banks, those banks will become increasingly incentivised to pass costs on to consumers.

A radical alternative: ‘Impose controls on cash withdrawals.’

The Rest…HERE

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