
ECB imposes negative interest rate - eplanit
http://www.bbc.com/news/business-27717594
======
onedognight
The negative rate is only on deposits over a bank's minimum reserve
requirements.

 _The negative deposit facility interest rate will also apply to: (i) banks’
average reserve holdings in excess of the minimum reserve requirements; (ii)
government deposits held with the Eurosystem that exceed certain thresholds
that will be set in the relevant Guideline to be published by 7 June; (iii)
Eurosystem reserve management services accounts if not currently remunerated;
(iv) participants’ account balances in TARGET2; (v) non-Eurosystem NCB
balances (overnight deposits) held in TARGET2; and (vi) other accounts held by
third parties with Eurosystem central banks when stipulated that they are not
currently remunerated or are remunerated at the deposit facility rate._

[1]
[http://www.ecb.europa.eu/press/pr/date/2014/html/pr140605_3....](http://www.ecb.europa.eu/press/pr/date/2014/html/pr140605_3.en.html)

~~~
cgio
Which, given my layman's understanding, implies that the policy is at the same
time idiotic and genius. More specifically, the deposits are mandatory and
under the liquidity coverage ratio in Basel. Therefore, the negative rate will
only have the intended effect as long as the financial institutions maintain a
higher than required coverage. That extraneous buffer being minimised, the
incentive will be to keep liquidity in government bonds and especially those
from big economies with good ratings, essentially moving liquidity to the
centre of the European economy (Germany and maybe France.) Therefore, the
periphery economies will be funding the central ones. Genius. Or Idiocy. From
a purely theoretic perspective, the efficiency of these economies should be
bolstered, but this happens to the detriment of the periphery and more or less
diminishes their chance to balance their performance. The question is whether
the goal of the Euro Area is economic performance or economic balance and
stability.

~~~
cgio
Instead of a simple down-vote, I would appreciate an argument. After all, I am
not claiming to be an expert on the subject and I am completely open to being
educated about how this measure could work out.

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fennecfoxen
Meh. Monetary policy alone can't save the economies of the floundering
European nations. If it's economic growth they want, they'll need to do
something about actually reforming the stagnant, over-regulated business
environment. Or streamlining government spending so they can lower taxes
without crushing austerity measures. Or cultural changes, encouraging
innovation and entrepreneurship.

Good luck with that.

~~~
TazeTSchnitzel
The Eurozone's problems don't really stem from "over-regulation".

~~~
fennecfoxen
The Eurozone is a diverse set of nations, but many of the economies with the
worst problems have over-regulation in some areas, especially labor-related
regulations. Oddly enough labor regulation has significant impacts on economic
growth and unemployment. :P

I don't actually care to prepare a well-sourced and boring essay for this tiny
corner of Hacker News. Instead, I will leave you with an approachable anecdote
about trying to open a business in Greece selling olive oil on the Internet.
You'd think this would be the perfect business for Greece, but (spoilers) it
takes 10+ months and involves stool samples.

[http://www.nytimes.com/2012/03/19/world/europe/in-greece-
bus...](http://www.nytimes.com/2012/03/19/world/europe/in-greece-business-
rules-can-puzzle-entrepreneurs.html?pagewanted=all)

(Postscript. The article notes that some of the delays may be related to not
paying the "speed tax", i.e. bribery. _That_ is a story of the regulatory
apparatus meeting Corruption for Extra Fun Times.)

------
trhway
as a banker, before i had to buy government bonds using cheap government money
and profit on that difference, and now i have only to borrow and do nothing...
It's good to be a banker.

~~~
fennecfoxen
It's even better to be a bond-issuing government.

~~~
logicallee
how about the part where you get 30% of everyone's income, and the (sole)
right to take it by force - yeah it's good to be a government. this is getting
silly.

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bequanna
Are deflationary fears driving this?

It is tough to imagine much demand-driven growth in the developed/developing
world given how quickly the birth rate is plunging.

Most of Europe is already below the 2.1 birth rate required for sustainable
population numbers:

[http://www.economist.com/news/international/21603024-why-
shr...](http://www.economist.com/news/international/21603024-why-shrinking-
populations-may-be-no-bad-thing-quality-time)

------
antr
Denmark has already been doing this 'experiment' since 2012[1] and
unfortunately the bankers didn't jump on the streets shouting: money! credit!
credit at cheap prices!

Time will tell, but the precedent isn't a good one.

[1]
[http://www.bankofengland.co.uk/research/Documents/ccbs/cew20...](http://www.bankofengland.co.uk/research/Documents/ccbs/cew2013/presentation_lynggard.pdf)

------
madcaptenor
How are negative interest rates implemented?

~~~
vesinisa
The commercial banks deposit their money in the central bank. Normally, the
central bank pays (usually quite minimal) interest to the commercial banks for
that money. With negative interest rates, the banks' deposits in the central
bank start loosing value, i.e. the banks must "pay" the central bank a premium
for holding their money.

The desired effect of negative interest rates is that commercial banks more
readily give out loans to businesses, rather than just keeping their reserves
idle, as the potential returns from successful lending are better. The idea is
to inject more money in circulation and stimulate economic growth.

~~~
rmc
Why do the commerical banks store it with the central bank? Why not store it
themselves?

~~~
vesinisa
AFAIK, in modern fractional reserve banking the commercial banks enjoy a
special privilege for the balance that they hold at their central bank
account. The balance at each bank's account is called its reserve, and for
every euro the bank holds in reserve, it can actually lend out a far greater
sum. Currently, for each euro at its central bank account, a commercial bank
can lend out €100 to their clients (borrowers). (Interestingly, this extra
money that the bank lends out materializes out of thin air.) So, the banks
still have a great incentive to keep their money at their central bank
account, because it's the only account that adds to their fractional reserve
base.

~~~
Tycho
I don't think so: banks are capital constrained, not reserve constrained.
There's other types of money that make up their capital base as well as
central bank reserves.

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stuki
Good way to keep resources locked up in zombie companies unable to generate
even 0% return, by letting them roll over loans despite destroying value.

Instead of flushing out the stagnant resource pools, so they could be put to
better use doing something less wasteful.

------
memossy
Moving from being a investment strategist to a startup founder next week, here
are the thoughts on all of this sent to clients earlier..

"As widely expected the ECB has moved to negative deposit rates in the latest
attempt to look useful.

We haven’t seen this happen in many places, but aside from Switzerland, which
is always a bit odd, one of the more interesting instances was Denmark back in
2010 when the DKK peg to the Euro was under pressure as investors bailed on
the EU. The result of this move was telling, in that rather than forcing the
banks to lend more to mobilise reserves, Danish banks took a kicking on margin
expansion and lending collapsed even as deposit flight occurred. It did
stabilise the DKK exchange rate though, allowing it to depreciate gently.

I think a similar motive is behind this move, primarily to help out Germany
where disinflation is very much in place and the surprising strength of the
Euro, which I noted last year was due to its assumption of old-Yen like
qualities, particularly at a time of taper tantrums, is starting to drag on
exports.

It will be interesting to see what happens here even as Spain and Ireland
enjoy their ability to borrow money even more cheaply than the US (really,
check the 5 year). My feeling is that it will be difficult to actually devalue
the Euro significant from here, particularly as the Eurozone as a whole has
moved into an export surplus as peripheral deficits have collapsed on falling
demand, offsetting the German surplus handily. A fall in the recently
recovering M3 is also likely and the lower-for-much-longer policy of the ECB
will look particularly attractive on the fixed income side for those wondering
if the recent rally in US bond yields is likely to reverse - duration in bunds
looks less painful than in US govvies. Money market funds also look quite
weird in this environment, with 800bn Euros or so in these vehicles about to
break the buck with German 2yr paper still positive.. For now..

As such, I think the Euro may well continue to strengthen after a bit more
downside, thus weakening the dollar, EU bank lending will roll over further
along with margins and economic malaise is likely to filter into Germany as
macroeconomic imbalances extend and disinflation continues, particularly if my
negative view on energy prices is correct."

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bjoerns
Being a practical guy, I wonder if banks' accounting systems can cope with
negative interest rates.

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ThePhysicist
Makes perfect sense: To combat a crisis which was caused by an overabundance
of cheap money and a deregulated market we will put more money into the system
and continue deregulating.

~~~
bjoerns
"Insanity is doing the same thing over and over again, but expecting different
results."

~~~
jxjdjr
Why do people say this? This is not the definition of insanity. It is the
definition of stupidity. Insanity is something very different, and the quote
doesn't make sense with it. It should be 'Stupidity is doing the same thing
over and over again, but expecting different results.'

~~~
bjoerns
I guess it's in the eye of the beholder. Like so many things in life.

------
kaonashi
Push the string harder!

~~~
jusben1369
Lol. Not quite accurate but a fair criticism. Note that in the US after the
GFC there were deficit spending to stimulate the economy that helped create
the Tea Party. In Europe there were instead austerity measures which helped to
radicalize the population with a surge in right wing politics. In 2014 the US
economy is growing, deficits are falling and the Tea Party is fading. In
Europe sadly the economy is stalling and the risks of political unrest
increasing leading to unique measures like the one in the article. It was sad
to see the Europeans make these mistakes given what history has taught us.

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ISL
Are banks required to have deposits on hand at ECB? Isn't hoarding physical
cash preferable to a negative interest rate?

~~~
pmontra
There isn't enough cash to do that.

Quoting
[http://www.ecb.europa.eu/stats/money/aggregates/aggr/html/in...](http://www.ecb.europa.eu/stats/money/aggregates/aggr/html/index.en.html)
(tab Background) "M1 is the sum of currency in circulation and overnight
deposits;". From
[http://sdw.ecb.europa.eu/reports.do?node=1000003478](http://sdw.ecb.europa.eu/reports.do?node=1000003478)
on April 2014 we had M1 = 5,498.8 billions Euro

Banknote circulation data at
[http://www.ecb.europa.eu/stats/euro/circulation/html/index.e...](http://www.ecb.europa.eu/stats/euro/circulation/html/index.en.html)

Banknotes: 948 billions Euro Coins: 24 billions Euro (*)

~~~
ISL
That's not the bank's problem, though, it would be the ECB's problem if banks
decided to hoard.

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opendais
I'm glad they are doing something but I worry it might be too little too late.

