The Global Financial Crisis has led central banks around the globe to adopt a series of “unconventional” monetary policy measures. The most visible has been the lowering of interest rates. Several central banks – including the Bank of Japan, the European Central Bank, the Swiss National Bank, the Swedish Riksbank and Denmark’s Nationalbank – have gone as far as to introduce negative interest rates.
And this has consequences for Money in physical form such as banknotes and coins. More.
Lower interest rates are reducing the opportunity cost of holding cash. And they are also making other assets less attractive.
At a recent speech at Yale Financial Crisis Forum, Benoît Coeuré, Member of the Executive Board of the European Central Bank spoke of the “specialness of negative nominal interest rates”. He stated: “Since cash offers a zero nominal return, at some point it will dominate assets with negative nominal yields. For example, if banks were to charge significantly negative rates on deposits, then the higher return on cash could lead households and businesses to withdraw their deposits. And this disintermediation would be likely to pose risks to financial stability. Of course, holding cash is not entirely convenient or costless. It would be cumbersome (not to mention risky) to buy a car or a house in cash, and storing a large amount of cash requires high-security storage as well as insurance. These costs of holding and insuring cash explain why the effective lower bound on interest rates is below zero.”
In September 2015, Bank of England Chief economist put forward a series of radical options to solve the Zero Lower Bound issue. One solution could consist in “randomly invalidating banknotes by serial number”; another would be to “remove the ZLB constraint entirely by abolishing This is often used as a generic expression to refer to banknotes, versus the “metal currency” expression, which refers to coins. More.” A third option is to “set an explicit The rate at which one currency will be exchanged for another. More between See Banknote paper. More The money used in a particular country at a particular time, like dollar, yen, euro, etc., consisting of banknotes and coins, that does not require endorsement as a medium of exchange. More and electronic (or bank) From the Latin word moneta, nickname that was given by Romans to the goddess Juno because there was a minting workshop next to her temple. Money is any item that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular region, country or socio-economic context. Its onset dates back to the origins of humanity and its physical representation has taken on very varied forms until the appearance of metal coins. The banknote, a typical representati... More.”
Several signals could be showing that we could be getting closer to this zero lower bound. In June, Reuters reported that Commerzbank, one of Germany’s largest banks, was considering storing banknotes in their vaults instead of paying negative interest rates if they deposit it with the ECB.
And on 11 August, Bloomberg reported German Raiffeisen bank in the Bavarian village of Gmund am Tegernsee announced it will start charging retail customers to hold their cash. From September, for savings in excess of 100,000 euros, the community bank will charge 0.4 percent.
The bank is small and the measure will only affect a very small number of customers – the bank says less than 140. But other banks may follow.