Why do banks in Europe pay their borrowers for loans? On the issue of negative interest rates What is negative bank interest
Let us recall that since October 27, 2014, this interest rate has been at a historically low level in Sweden: 0%. Now she is in the red.
At the same time, Riksbanken is buying government bonds worth 10 billion crowns, and is ready to buy more, the central bank said in a press release.
Riksbank analysts suggest that low inflation, which was at minus 0.3% in December at the rate of development for the year, may have already reached the “bottom”, so to speak, and will now begin to rise. In any case, the goal of 2% inflation per year is still far away.
Analyzing the situation in the surrounding world, the Riksbank concludes that the world economy is “bouncing back” after the financial crisis, but slowly. Since December last year, however, the risk of deterioration in economic development has increased. In particular, the fall in oil prices, which can have a positive impact on production growth, on the other hand, leads to low inflation on a global scale. The situation in Greece also does not add confidence in the development trends of the global economy.
As for Sweden specifically, the Riksbank believes that production growth is supported by both low oil prices, a weak Swedish krona exchange rate, and a low bank interest rate. According to the bank, Sweden's GNP will grow faster and the labor market will strengthen.
What will this “minus rent” entail for Swedish residents: What will happen to bank loans? What will happen to the money that people put aside “in reserve” in their bank deposit accounts? What will happen to our mortgage loans?
A negative refinancing rate means that banks have to pay to deposit money into their Riksbank accounts. And they are obliged to do this if, as a result of all banking transactions of the current day, they have money left in their cash desk (overnight/overnight deposits).
But will this mean that banks will want to cover these costs at the expense of their clients? And they will start charging us for the fact that we want to put our saved money into a savings bank account?
In principle, interest rates on our accounts or mortgages should not be affected by these negative rents. Because the level of interest on deposit accounts and on loans is determined by each bank individually, and not by the Riksbank.
But for the banking system as a whole, the level of this short-term refinancing rate is of great importance.
This rate determines the interest that banks pay when they borrow money from each other. It could also lead to businesses being able to take out loans at lower interest rates. And this, in turn, can lead to an increase in investment, that is, precisely the stimulation of the Swedish economy that the Riksbank is striving for by lowering the interest rate. And an increase in production usually “triggers” the mechanism of inflation growth. This is what the Riksbank is trying to achieve.
Experience of other countries with negative interest rates shows that if this minus is small, then this does not affect small clients who habitually save money in bank accounts. In Denmark, FIH announced in March last year (following the central bank's rate cut) that for every 1,000 kroner a customer holds in the bank, he will have to pay 5 Danish kroner. According to the Wall Street Journal, clients have already begun to leave the Danish bank. What will happen if other banks follow FIH, asks the rhetorical question of the newspaper Svenska Dagbladet today in its economic supplement.
Anticipating today's move by the Central Bank, two directors of large Swedish private banks have already spoken out on this topic and assured their clients that they - that is, all of us - will not have to pay to keep their money in the bank.
The two directors are Annika Falkengren from Svensk Enshilda Banken/SEB and Michael Wolf from Swedbank.
Mikael Wolf from Swedbank assured (in an interview with the Ekot newsroom) Swedish Radio that banks will do everything to protect their small depositors. Because otherwise, they - these depositors - will simply take their money from the bank and hide it, as they say, “under the mattress.” However, neither he nor his colleague Annika Falkengren can give any guarantees. No one can guarantee that the “negative rent” for banks will not turn into an equally negative rent for small depositors.
An expert on private economic affairs (microeconomics), Annika Creutzer, believes, for example, that “negative rent” will affect not only how and where people will store their savings, but also the level of wages. Here's how she explains the impact of this interest rate cut:
This means that when banks borrow money from the Riksbank, the Riksbank charges a fee for it. 0.1 percent. This means that banks will want to give us, clients, even more loans and credits, and these loans will cost us less. But there will be no interest on savings at all; this is a new situation for us. It is possible that we will also have to pay to open a savings account in a bank, says Annika Kreuzer, expert and journalist.
She describes inflation as the “lubricant” of the economy and explains its necessity in terms of paying for goods and services. The Riksbank's goal is to keep inflation low and stable. But now, due to growing concerns and turbulence in the global economy since December last year, the Riksbank is cutting interest rates and buying government bonds worth 10 billion crowns. The situation, however, is not unique to Sweden, says Annika Kreuzer:
This is an international problem. Sweden is a small country with an open economy, large exports and imports. We are influenced by what happens in the world. What is happening now in Sweden has already happened in Denmark and Switzerland.
Falling oil prices, problems in the eurozone, “limping” production growth in the US and the economic crisis in Greece - all this affects the Swedish economy. And it could be years before the situation changes, she said.
How will today's interest rate cut affect ordinary people? She answers this question:
I don't think there will be any changes in mortgage loans. But saving in a bank loses all meaning, because there is no interest on it. But it’s better to keep money in the bank, even if it doesn’t grow there, than at home under the mattress. Just for security reasons,” says Annika, meaning that you shouldn’t put yourself at risk of robbery or home theft if you hide money at home.
Annika Creutzer suggests that banks may increase fees for savings and savings accounts. There is little hope that interest rates on deposits will increase. But what is important, she emphasizes, is to check: does the bank have government guarantees for deposits? So that this money does not “melt” in the account over time.
As for the impact of a negative interest rate on wages, it assumes the following scenario:
It is likely that employers will say: since we are not paid more for our goods (i.e. there is no inflation), then we cannot raise wages. It is possible that for some categories of workers this will mean a reduction in wages, said Annika Kreitzer in an interview with our colleague Isabelle Swahn
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Silent Hill
The story takes place in the city of Silent Hill. Ordinary people wouldn't even want to drive past it. But Rose Dasilva, little Sharon's mother, is simply forced to go there. There is no other choice. She believes that this is the only way to help her daughter and keep her out of the psychiatric hospital. The name of the town did not come out of nowhere - Sharon constantly repeated it in her sleep. And it seems like a cure is very close, but on the way to Silent Hill, mother and daughter get into a strange accident. Rose wakes up to find that Sharon is missing. Now the woman needs to find her daughter in a cursed city full of fears and horrors. The trailer for the film is available for viewing.
Mirrors
Former detective Ben Carson is going through hard times. After accidentally killing a colleague, he is suspended from the New York Police Department. Then the departure of his wife and children, an addiction to alcohol, and now Ben is the night watchman of a burned-out department store, left alone with his problems. Over time, occupational therapy pays off, but one nightly round changes everything. The mirrors begin to threaten Ben and his family. Strange and frightening images appear in their reflection. To save the lives of his loved ones, the detective needs to understand what the mirrors want, but the problem is that Ben has never encountered mysticism.
Asylum
Kara Harding is raising her daughter alone after the death of her husband. The woman followed in her father’s footsteps and became a famous psychiatrist. She studies people with multiple personality disorder. Among them there are those who claim that there are many more of these individuals. According to Kara, this is just a cover for serial killers, which is why all her patients are sent to death. But one day the father shows his daughter the case of the tramp patient Adam, who defies any rational explanation. Kara continues to insist on her theory and even tries to cure Adam, but over time, completely unexpected facts are revealed to her...
Mike Enslin doesn't believe in an afterlife. As a horror writer, he is writing another book about the supernatural. It is dedicated to poltergeists living in hotels. Mike decides to settle in one of them. The choice falls on the infamous room 1408 of the Dolphin Hotel. According to the hotel owners and city residents, evil lives in the room and kills guests. But neither this fact nor the senior manager's warning frightens Mike. But in vain... In the issue the writer will have to go through a real nightmare, from which there is only one way to get out...
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The other day, a user of the well-known information and entertainment community “Pikabu” on the Runet reported that recently the German bank Solaris has been offering a negative interest rate of -5% per annum. That is, a client can take out a loan of 1,000 euros, and only need to pay back 948 euros.
We decided to find out how this is possible, and why such loan offers do not surprise anyone in Europe.
Why does the bank issue a loan with a minus rate?
The use of negative interest rates is no longer new in the global economy. The first country where banks began to “pay extra” to their clients was Japan. At the end of the last century, the government faced a long recession, which led to a decrease in consumer prices in the domestic market (deflation). The country's leadership decided to stimulate the economy by increasing public debt and negative interest rates.
Later, this practice began to be used by European countries. In 2012, the National Bank of Denmark established a negative rate on weekly certificates of deposit. At the same time, the European Central Bank began to actively reduce the base interest rate.
In June this year, the ECB once again set the interest rate at zero and the deposit rate at -0.4%. The deposit rate is similar in Germany. It is this indicator that banks focus on when setting rates on loans and deposits.
Therefore, the negative rate in the German bank Solaris is natural in the context of the pan-European policy of quantitative easing.
It is worth noting that loans with minus rates are not a general trend among German banks. For example, Noris Bank issues loans at a rate of 2.90%, but can also set a minus rate if necessary.
Solaris took advantage of the opportunity to attract new customers and obtain their data using a loan at a minus interest rate.
Loan with a negative rate from the German bank Solaris
According to the user who posted about this bank, in Germany there is high competition among credit institutions that find it difficult to find new borrowers.
The vast majority of Germans have an account in the bank where their grandfather and great-grandfather are,” he noted.
Therefore, Solaris management probably hoped to use a loan with a negative rate to find new clients among young people in the hope of further cooperation with them.
Have there ever been real cases when a bank paid its borrower?
In 2016, Danish man Hans-Peter Christensen, who took out a mortgage loan at a floating interest rate from a local bank, received 249 Danish kroner ($38) from his lender. Then, in the fourth quarter, the deposit rate was -0.0562% (now - -0.65%). Along with Christensen, other mortgage borrowers also received similar rewards.
In what other countries can there be a negative interest rate on loans?
In addition to Germany and Denmark, negative rates are now in force in Sweden, Switzerland and Japan. For example, Switzerland recently set the deposit rate at -0.65%. However, we were unable to find loan offers with a negative rate on the websites of local banks. Just in May last year, Bloomberg reported that Switzerland's largest bank, UBS, would set a negative rate on deposits whose account value exceeds 1 million euros.
In Japan, the deposit rate is -0.069%. We know nothing about consumer loans with a similar rate, but mortgages in this country are issued at 0.5%.
The lowest rate among the above countries is in Sweden - -1.25%.
So are negative interest rates a good thing?
More likely no than yes. Negative rates themselves are a consequence of deflation caused by a prolonged recession in the economy. And deflation leads to a fall in aggregate consumer demand, a reduction in the amount of money in the economy and a decrease in the growth of its real value, which reduces the income of producers, forcing them to reduce production and fire workers. As a result, the state budget receives less taxes.
In turn, low interest rates are not attractive to investors, who in such conditions most often transfer their capital to other countries. Thus, even for banks it is easier and more profitable to invest in foreign assets with higher returns than to lend to the population at a low interest rate within their own country.
In addition, along with cheaper consumer goods, wages also become cheaper, and the purchasing power of the national currency in foreign countries decreases. At the same time, residents of countries experiencing deflation cannot compensate for the loss of value of their savings, since deposits in banks also have a negative rate.
All these processes unwind a deflationary spiral, which can provoke high levels of unemployment, a reduction in investment and output.
Today I bring to your attention a small educational program about what it is negative discount rate. I already discussed the concept itself once (via the link), talking about what its increase and decrease leads to. Let me briefly remind you that this is one of the key financial levers at the disposal of the Central Bank of the state, with the help of which it regulates the level of inflation in the country, the exchange rate of the national currency and, globally, the pace of economic development.
The discount rate largely determines the cost of attracting and selling resources on the interbank market, as well as rates on loans and deposits for enterprises and households. The higher the discount rate, the more expensive the resources, which slows down economic growth, but also curbs inflation and devaluation. And, conversely, the lower it is, the stronger the economic growth, but at the same time the stronger the inflation and devaluation.
The size of the discount rate can serve as one of the indicators of the state’s economy: the lower it is, the higher the level of economic development of the country. For example, in the most developed countries the current discount rate ranges from 0 to 1%.
However, there is another side to the coin. Practice shows that even with excessively low interest rates, economic growth rates can slow down under the influence of other factors, which is what we are now seeing around the world. Likewise, inflation is falling, in many countries with a high level of development it is close to zero or even often negative (deflation). And this is by no means a good indicator, as many may think.
In such a situation, it is very difficult to stimulate the economic development of the country. Judge for yourself: loan rates are already minimal, loans are available to everyone, but this is not enough for the desired economic growth. And in such a situation, the country’s Central Bank may resort to such an extreme measure as establishing a negative discount rate. What does this mean?
A negative discount rate, influencing pricing on the state capital market, leads to the formation of, if not negative, then at least zero rates in the country's banking institutions. This suggests that when receiving a loan, the borrower not only does not pay interest, but can also receive a bonus from the bank for lending, and the depositor, on the contrary, pays extra to the bank for keeping his money on deposit there.
For us this still seems like a fantasy, but for some countries it has already become a reality. Negative discount rates were introduced by banks in several European countries, and most recently by the Bank of Japan.
Negative interest rates currently have the highest values in Switzerland and Denmark – there they amount to -0.75%. In Sweden the discount rate is -0.5%, and in Japan - -0.1%. So far there are only 4 countries with negative interest rates, but it is possible that other states may be included in their number. There has already been a lot of talk about establishing a negative discount rate, for example, in Israel; the Czech discount rate (0.05%) is closest to zero on the positive side.
Why do central banks introduce negative interest rates? To stimulate business development and economic growth. If, in the opinion of the central bank, there is not enough business lending in the country even at positive rates close to zero, then at zero and, especially, negative rates, more loans will be taken. On the other hand, people who keep savings on deposits, when they have to pay extra to the bank for this, will think about withdrawing them and investing them in other instruments that contribute to economic development, for example, in the same securities of enterprises.
The introduction of a negative discount rate can lead to both the strengthening and weakening of the country’s national currency. For example, when the Bank of Japan recently resorted to such a measure, the Japanese yen strengthened against all world currencies by about 10% in a couple of weeks, and this was even before the new conditions came into effect. In Switzerland, on the contrary, the establishment of a negative discount rate helped to slightly and briefly reduce the exchange rate of the Swiss franc, for which the country often spent enormous financial resources (to maintain and maintain the exchange rate below the administratively established value, as a result, this measure was abandoned).
What negative consequences could the introduction of a negative discount rate lead to? Well, for example, to failures of banking computer systems, which calculate many indicators based on its value - a similar problem immediately arose in Denmark.
In many countries, the yield on government bonds held by both domestic and foreign investors is tied to the discount rate. If the discount rate becomes negative, it turns out that now they will not only not receive income on the purchased securities, but will also have to pay extra for owning them.
Owners of savings in various pension, insurance, and investment funds, the profitability of which is also calculated based on the level of the discount rate, may also experience losses.
As a rule, when introducing a negative discount rate, the Central Bank believes that this is a temporary last resort: when the planned inflation and economic growth indicators are achieved, it can be raised back and made positive. However, it is difficult to plan how things will actually turn out; it is likely that negative interest rates will be in effect in a number of countries for at least several years.
That's all. Now you know what a negative discount rate is and what it is used for. Increase your level of financial literacy on the website. See you again!
In some Swiss banks, interest rates on retail deposits have already dropped below zero. Are negative interest rates on deposits possible in Russia?
Of course, negative rates are a nightmare for savers, but they would be very welcome for borrowers. Imagine: you take a ruble and return fifty dollars. Dream!
Of course, savvy investors can combat negative rates by moving into cash. However, for a VIP, going to the cache is not an option. After all, the costs of storing and transporting cash can “eat up” up to 1% per year.
Essentially, negative deposit rates are the equivalent of a tax on money. Previously, negative rates were considered a theoretical delight. Although initially “proto-banks” (for example, goldsmiths) charged a fee for storing money - for placing deposits.
The idea of demurrage, negative interest rates, by German businessman and social reformer Silvio Gesell (1862-1930) was not seriously considered for a long time. It was believed that the natural limit on interest rates was zero.
However, already in April 2009, Gregory Mankiw predicted a negative Fed key rate in the New York Times. If lower interest rates stimulate the economy, and the key rate is already close to zero, why not reduce the rate to negative values? The idea of negative rates seems absurd: lend a dollar, get 99 cents. But the idea of negative numbers, reminds Mankiw, initially seemed absurd.
Mankiw’s prediction quickly came true, although not with regard to the Fed: in July 2009, the Riksbank, Sweden’s central bank, introduced negative rates.
Then negative key rates were established in a number of other countries, including Switzerland, Japan, Denmark, as well as in the eurozone countries (deposit rate - -0.4% per annum). Moreover, negative interest rates have also been established in the interbank lending markets of some countries. Bond yields have also turned negative in some countries.
The Japanese and Germans responded to ultra-low interest rates by increasing demand for safes. Negative rates pose a threat of a run on banks and can lead to a liquidity crisis.
Probably the first bank to upset its customers with negative interest rates on deposits was Alternative Bank Schweiz, which since 2016 introduced a rate of -0.75% on deposits worth more than 100 thousand Swiss francs. Another well-known Swiss bank, Lombard Odier, upsets its wealthy clients in the same way. So the first victims of negative deposit rates are wealthy clients - it is difficult for them to “escape to cash”.
Are negative rates possible in Russia? Not excluded. The condition for their appearance may be deflation. Deflation itself is pleasant and useful for consumers - what's wrong with falling prices? However, it is not deflation that is bad, but its main reason - a reduction in demand - for example, due to a crisis. People don't have money to buy goods, so prices are falling. Of course, if the reason for the decline in prices is a reduction in production costs, for example, as a result of technological progress, then one can only rejoice at such deflation.
For now, the threat of negative interest rates in Russia appears to be low. However, a recession may lead to the realization of this threat. It is possible to soften monetary policy even to negative interest rates.
