Hiding from negative interest rates

Simon Anderson reflects on reports of European banks hoarding money to protect themselves from negative interest rates and what that could mean for us…


What does the person-in-the street do when they lose faith in banks? They hide money under their mattress. After many years of telling customers to put their money to work, it seems European banks may be considering the same course of action.

As rates sink to zero across much of Europe, it is becoming an increasingly sensible option for banks to hoard cash, turning electronic money into hard Euros and storing it away.

And it’s a massive mattress. The FT reports today that the total Euros in circulation and held by banks is some €2 trillion, equivalent to the space under 23,000 double beds.

Why could this happen? It’s a vicious circle driven by economic policy and financial necessity.

As European central bank rates sink to zero in an effort to encourage banks to lend money to businesses (instead of holding it), the levy banks pay for keeping funds in central banks begins to bite.

But banks too are worried about the economy and the risk to capital. Rather than paying the hundreds of millions of Euros it costs them each year to store cash in central banks, banks are reported to be investigating other options to store cash, such as high security vaults. And if the cash is not in a central bank, it’s not losing money if rates turn negative.

If banks follow this route it could have serious implications. The same lever that central banks are deploying to stimulate growth may, through unintended consequences, create a situation where banks could end up lending less to businesses.

Troubling times, but is it time to start sticking cash under your own mattress? Not quite yet, it’s just one option for banks and there are a host of logistical problems and additional costs in moving back to hard cash. You can therefore sleep tight – for now.

Simon Anderson, Director, Corporate Communications