We’ve taken note of how commercial banks are pushing back against negative interest rates, which are killing their profits. As we wrote in June:
Central bankers are pressing onward with their failed negative interest rate experiment, oblivious to the damage that it is doing to banks and long-term investors like life insurers and pension funds.
Even more bizarre is the central bank assumption that by charging banks for reserves, they can force banks to lend. First, the very need to resort to negative interest rates results from crappy fundamentals. Entrepreneurs are not going to borrow to invest in new projects just because money is on sale. They invest because they see market opportunities; the cost of money being too high can constrain investing, but cheap money won’t produce loan demand in the absence of attractive projects. The only exception is activities where the cost of money is the biggest cost of doing business. That is the case for levered speculation.
Economists are way way late in the game acknowledging the need for more demand by calling for more fiscal spending.
But central banks ex the Fed act as if they can force business to take up the slack, as if banks can noodle them full of loans like geese and they will be forced to invest and hire as a result.
Second is that banks have to be leery of making any long-term loans now. Even though no end of ZIRP and negative interest rates is in sight, they know if the monetary authorities ever are in a position to increase interest rates, they will show losses on intermediate and long-term assets unless they have adjustable interest rates. And the losses will be biggest on the riskier loans, since credit spreads typically widen in a tightening cycle.
So it should come as no surprise that banks are starting to try to find ways to circumvent the central bankers’ nutty scheme. As we reported in March, some small Barvarian banks said earlier this year they were looking into keeping cash on premises rater than pay for parking deposits with the Bundesbank. Yesterday, Commerzbank saber-rattled that it might follow suit. . Japanese banks are also trying to slip the leash.
The Financial Times provides an update in its lead story today, Banks look for cheap way to store cash piles as rates go negative. The wee problem is, as the article makes clear, keeping lots of cash on hand is costly, so these initiatives look to be yet more empty protests than real threats. However, the bigger issue, as we’ve repeatedly stressed, is that banks aren’t going to run out and make more loans even with the central bank cudgel of negative rates, particularly when loan demand is weak. Key sections from the Financial Times account:
Europe’s highways are not yet jammed with heavily guarded trucks transporting money to top-secret locations, but if it becomes financially sensible for banks to hoard cash as rates are cut even further, the practice could undermine central banks’ ability to use negative rates to boost growth.
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…
Fortunately for central banks, the hoarding of cash creates a host of other costs.
Part of it is storage and transport, though they are not the biggest problems….
Bank robbers, earthquakes and other unforeseen disasters, on the other hand, are a problem. Or rather, the delicate issue of finding an insurer willing to take on those risks while charging a reasonable fee…
The German banker said it is unlikely that cash hoarding would become a widespread practice. Rather, it is a good way of registering banks’ protest over the impact of negative rates. “It would be sensible for two or three banks … to make clear that there is a lower bound for interest rates,” he said. “I don’t think the Swiss National Bank will be able to cut rates again without insurers and banks trying to hoard cash.
“[Hoarding cash] is in nobody’s interests. It would cost banks a lot and would clearly mean that central banks can’t really do anything to lower interest rates at the moment. Every side wants to avoid it.”
And as Amar Bhide points out in an op-ed in the pink paper today:
Sweden’s Handelsbanken is an exemplar of prudence, barely touched by the 2008 financial crisis. It operates globally like a small community bank, to the point that it has just fired the chief executive, reportedly for attempting to centralise power. Branches lend as they see fit but are required to scrutinise creditworthiness and shun dodgy borrowers. The target loan loss ratio is zero; low loan losses, in turn, allow the bank to offer competitively priced loans and personalised service to creditworthy customers.
Since it is better placed than lenders that rely on rule books or statistical models to assess the creditworthiness of entrepreneurs, Handelsbanken is also well positioned to satisfy the credit needs of small businesses. What is good for Handelsbanken is therefore good for long-term economic growth as well as for financial stability.
However, prudent case-by-case lending also undermines the stimulative effect of the loose money unleashed by central bankers. Experienced financiers with their fingers on the local pulse will not lend more to less worthy borrowers simply because of low or negative interest rate policies. If anything, easy money — for all the grand theories of its macroeconomic benefits — worries them.
Bhide argues that central banks should get out of the “manage the economy” business, return to their traditional focus of safety and soundness, and view economic growth as the byproduct of doing that job well. While that is a good idea in theory, the fact is that Anglo-Saxon style finance is based on lending against collateral, which is inherently prone to boom-bust cycle. A central banker would be widely criticized for choking off what he sees as a developing bubble, since they create growth and wealth until they go boom. And that’s before we get to the fact that a lot of what used to be lending is now origination with the intent to securitize. That means central banks now see their role as acting not just as lender of the last resort, but as Perry Merhling has put it, dealer of the last resort. Yet that sort of collateral-based, standardized model of lending is particularly poorly suited to making small business loans, which is why US banks have largely abandoned it. Central banks are pushing on a string not just for the traditional reason that putting money on sale in a weak economy won’t lead entrepreneurs to run out and expand; it’s also that the channels through which small business loans are made have been abandoned by most financial firms.
Despite the emerging economic consensus that governments need to do a lot more in the way of fiscal stimulus, particularly infrastructure spending, politicians on the receiving end of decades of neoliberal indoctrination are reluctant to turn on the spending spigot. So in the meantime, central bankers seem determined to increase the beatings until morale improves.