more ZIRP refugees for US assets

[PeterR]

German cooperative sets -0.4% rate on funds over EU100,000
Move comes two weeks after ECB says no risk of cash hoarding


The 2th point seems wishful thinking by the ECB.


Via Bloomberg:

German cooperative sets -0.4% rate on funds over EU100,000
Move comes two weeks after ECB says no risk of cash hoarding
When the European Central Bank introduced a negative interest rate on lenders’ deposits two years ago, few thought things would ever go this far.

This week, a German cooperative savings bank in the Bavarian village of Gmund am Tegernsee — population 5,767 — said it’ll start charging retail customers to hold their cash. From September, for savings in excess of 100,000 euros ($111,710), the community’s Raiffeisen bank will take back 0.4 percent. That’s a direct pass through of the current level of the ECB’s negative deposit rate.

“With our business clients there’s been a negative rate for quite some time, so why should it be any different for private individuals with big balances?,” Josef Paul, a board member of the bank, said by phone on Thursday. “As it looks today, charges on deposits won’t be extended to customers with lower amounts” than 100,000 euros, he said.

Raiffeisen Gmund am Tegernsee may be a tiny bank that’s only introducing penalties to well-off customers — it says fewer than 140 will be affected — but in principle the ECB’s negative deposit rate was meant to encourage spending and investment in the euro area’s sluggish economy, not to tax thrifty Bavarians. A spokesman for the Frankfurt-based central bank declined to comment.



Indeed, introducing the sub-zero policy in June 2014 with a cut to the deposit rate to minus 0.1 percent, ECB President Mario Draghi said the move was “for the banks, not for the people.” Should banks decide to transmit the reduction to savers then that’s their decision. “It’s not us,” he said.

Since then, the ECB has chopped its deposit rate — what banks pay to park excess funds overnight — three more times. So far, policy makers have said there haven’t been any serious negative side-effects, such as customers withdrawing their cash and stashing it elsewhere. In that time, amid a moderate recovery, bank lending has returned to growth.

The risk for ECB policy makers now is that negative rates begin filtering through to the real economy while growth and investment is still sluggish, bringing the downsides of the policy without the upsides. Euro-area growth slowed in the second quarter, data released Friday show, leaving it vulnerable to any fallout from the U.K.’s vote to leave the European Union.

In that environment, lenders in Europe regularly complain — and the ECB has acknowledged — that negative rates depress their profitability. Some are already charging corporate clients with large deposits. The Bundesbank estimated last year that the low-rate environment would cut the pretax profit of German banks by 25 percent by 2019.

Retail Taboo

But only two weeks ago, ECB board member Benoit Coeure said retail customers were staying with their banks because of signs they wouldn’t be charged for their savings any time soon.

“Deposits of both households and non-financial corporations have been growing over the past two years, at a similar pace to the period before we entered negative interest-rate territory,” he said in a speech on July 28. “Rates on retail deposits seem to have a zero lower bound.”

Whether Coeure is essentially right — that Gmund am Tegernsee’s Raiffeisen is a rare case and on a broader scale the rates for ordinary depositors won’t go below zero — may depend on how lenders in Germany and elsewhere respond to the taboo on charging retail clients.

Michael Kemmer, head of the Association of German Banks, said in a statement on Thursday that he doesn’t expect others to follow suit.

“It’s up to each bank whether and how to charge for deposits,” he said. “The competition between banks and saving banks in Germany is much too strong.”

[PeterR]

source: http://www.cumber.com/

(highlights mine)


Cash, NIRP & Bonds—Part 2
August 15, 2016
David R Kotok
Chairman and Chief Investment Officer
Email | Bio

On July 29 we published a long piece entitled “Cash, NIRP & Bonds” (http://www.cumber.com/cash-nirp-bonds/).

Now we see a German bank succumbing to pressure and starting to charge its customers a pass-through of the negative interest rate that the commercial bank is paying to the central bank. In the eurozone, the lowest negative rate is minus 40 basis points. Under this scheme, a million-euro deposit now pays 4000 euros a year to store cash in the bank. Some economic tests can be applied to estimate what the charge will do by way of changing behaviors. A depositor with 10,000 euros in the bank could be charged only 4 euros a year, and many banks would not charge smaller and retail customers. The typical cutoff is at 100,000 euros. Thus our guess is that smaller depositors will not change their behavior by very much.

On the other end of the spectrum, we are seeing very large institutions developing cash-storage and cash-hoarding systems. An institution with cash reserves of 100 million euros might well spend less than 400,000 euros a year for a storage facility and thus be better off with cash than with a bank deposit. Readers may wish to develop their own estimates of behaviors and the break points that will trigger changes in those behaviors.

By looking at the physical cash (currency) in circulation in the various currencies where there is some type of negative-rate structure, we can watch the aggregate actions of all agents affected by negative rates. In all 6 currencies and in all 24 countries involved, we see increases in physical cash in circulation. Nowhere is cash shrinking. In addition, we can examine other currencies where the central bank rate is positive but the acceptance of the currency is widespread and reaches beyond the border of the country. America and the US dollar is the global leader in that category. We see US physical cash in circulation rising at about a 7% annual rate, and the rate seems to be accelerating. Various estimates place as much as two-thirds of that US dollar denominated cash outside of the United States.

One would expect cash used for transactional purposes to rise in aggregate in a way that resembles the growth rate of nominal GDP. That is the traditional test. Furthermore, the proliferation of electronic payment systems would suggest that the use of physical cash should be diminishing. (One can easily observe this trend by standing in any Starbucks line and noting how many customers use an electronic payment instead of cash.) So if electronic payments are growing but actual physical cash use is also growing, something else is going on.

Some say it is the underground economy or illegal uses of cash that have caused the demand for physical cash to rise. There is some truth in that, as anyone can discern based on anecdotal evidence. But those uses of cash have been around for a long time and estimates of their use are relatively stable. An exception may be the rising use of cash for the marijuana business as federal law inhibits traditional banking for that use. In Colorado, there is a lot of cash in circulation for this reason.

We think there is a second reason for rising worldwide physical cash demand, and that is negative-rate regimes. Negative rates change behavior. They are counterintuitive. They are using a form of central bank policy that penalizes economic players in order to try to achieve lending, borrowing, investing, and economic growth. But negative rates are damaging financial institutions that are dependent on a positive interest rate for their operations. And the world is now realizing the dangers that accompany negative rates.

As cash use rises, the monetary creation of additional money in electronic form morphs into physical cash. Electronic money ends up in a repo or as an excess reserve deposit at the central bank. Cash is held outside the system of banking. Thus rising cash in circulation impacts the money policy maker two ways. It reduces the reserves that are in the banking system and that itself may be a reduction of ways to be stimulative. And Cash is neutral or sterile. It is a permanent liability of the central bank or government and it has no credit multiplier in the traditional sense.

Thus rising use of cash in circulation is a tightening of monetary policy by definition. In the US it has been underway since the Fed stopped QE. In other jurisdictions rising cash use is dampening the central bank’s attempt to be stimulative. In our view, a static balance sheet size at a central bank like our Fed is an automated tightening structure, all else being equal. For policy makers this is something to think about. For investors, it means that the Fed may be tighter than many believe.