9 ms·

UK banks given six months to prepare for negative interest rates

62 points by SpaceNinja 6y ago

u678u 6y ago
Its about time it became normal in the UK for accounts to carry fees. I dont know how retail banking can continue without them. Esp the new fintechs they will have near-zero revenue coming in and have to pay to hold cash.
- syntheticnature 6y ago
  Negative interest has to deal with lending (and savings) base interest rates, not as a fee per se, but as a tool of monetary policy.
- robertnn 6y ago
  Why? Many banks are already making lots of money, regardless if you know how they make their money or not. I definitely do not agree that "its about time" to pay for having an account.
  - u678u 6y ago
    > Many banks are already making lots of money I think you mean some UK banks made money before rates went negative. The ones that made the most are in corporate and investment banking. Retail is a disaster zone.
- LatteLazy 6y ago
  Banks' investment/trading arms get substantial tax breaks and one condition is that they have a certain number of UK retail accounts. That's it really.
- jaywalk 6y ago
  If you go to your local branch and ask to pay some fees, I'm sure they can find a way to accommodate.
  - u678u 6y ago
    > If you go to your local branch I dont even have one any more. And I imagine most will be shutting down very quickly now.
stickfigure 6y ago
Can someone explain this, Matt Levine-style? I mean, if someone offered to pay me interest to take out a loan, I'd immediately request MAXINT.
- samizdis 6y ago
  This isn't Matt Levine style, or calibre, but it covers the basics: https://www.investopedia.com/articles/investing/070915/how-negative-interest-rates-work.asp https://www.investopedia.com/articles/investing/070915/how-n...
- toyg 6y ago
  The point is precisely that the Powers That Be want you to take out MAXINT - and then unload it on the wider economy as cheap loans to stimulate the economy. Whether that second part actually happens, or banks just use this extra cash to stuff their balance sheets, well... it's a bit of an open question, to put it mildly.
  - acapybara 6y ago
    See also: liquidity trap https://en.wikipedia.org/wiki/Liquidity_trap https://en.wikipedia.org/wiki/Liquidity_trap It's when, despite low/negative rates, borrowers prefer to hold cash than to take out loans.
  - jbob2000 6y ago
    The biggest problem is that the things people want to buy are in short supply. So the extra money doesn't actually help anything, you just get asset price inflation. I want to buy a house. If everyone has access to cheap mortgages, then everybody can buy a house! But there is a hard limit on how fast we can build housing. Even renovating a home has the same problem. Contractors in my area are raising their hourly rate now because everybody wants their home renovated! But there aren't enough contractors for everyone, so the price just goes up. Look at the video card market. There's a hard limit on the amount of video cards that the industry can produce. That doesn't change if suddenly everyone can afford the $2,500 price tags. The price just goes up by exactly the amount of money people get loaned! And there's a hard limit on the amount of entertainment I can consume in a day. A person has about 16-20 hours a day MAX to consume media. We literally can't listen to any more music, there's not enough time in the day. I can't spend any more money on media because I am physically unable to consume more. I don't see how this would stimulate anything? The reason I'm not buying anything isn't because I can't afford it, it's because it's not available at all! (Probably why the stock market is experiencing volatility right now - it's the only thing providing utility right now)
mensetmanusman 6y ago
Invest in safe-making companies.
- CTOSian 6y ago
  invest in guns and ammo
ridiculous_lol 6y ago
I wonder if there's an analysis of negative interest rates available across different economies.
jansan 6y ago
So if I take a loan, it would pay itself off after a while?
- treespace88 6y ago
  I don’t think so. All loans have terms and minimum payments. So if you borrow $1000 over a year at -1% you still have to make $990 in payments, or you will default.
  - blackbear_ 6y ago
    So, forgive the ingenuity, what prevents me from taking that 1000 loan, park it in my bank account, and repay the 990 due in a year (earning 10 in the process)?
    - hocuspocus 6y ago
      1) You probably cannot borrow from the central bank. 2) Your retail bank has to make money in one way or another, we haven't seen negative effective rate on personal loans yet, especially on small loans.
    - mattficke 6y ago
      Your bank is going to start charging you interest as well. They might have a teaser rate that's positive up to a certain balance, but there's limits to the arbitrage here.
    - xenocratus 6y ago
      1. Inflation: you will have 10 at the value of the currency in 2022, not 2021 2. Negative savings rates: > There are fears that negative lending rates, which are expected to lower borrowing costs for households and businesses, would force high street banks and building societies to offer negative savings rates. If you put it in your bank account you will lose some of it. The idea is that the bank is paying you to hold the money because otherwise it would have to pay the central bank more than that to hold (some of) it - or at least, that's how I understand it.
    - deleted 6y ago
1experience 6y ago
Can anyone counter my impression that we are witnessing in the Western world the exact same course of events that happened in Japan in the 1990s? (low growth, high debt, ageing population, low interest rates, rising of average P/E ratios). Am I wrong to expect that corporate valuations in Europe and the U.S. will not appreciate in the coming decades as they have in past decades? Edit: Yes, the U.S. and Europe are indeed in different economic positions, the U.S. can still avoid the spiral if it continues to attract skilled immigration and remains a low bureaucracy, easy-to do business environment.
- polskibus 6y ago
  More importantly, has Japan ever recovered from such state?
  - jonpurdy 6y ago
    I'm just a casual observer, but Japan had a "lost decade" post-bubble where average inflation and growth rates averaged 0%, but this has extended to a "lost two decades" now. (Side note: Japan's cost of living has also not increased with the rest of the world, which is why it's much more affordable to travel there these days than it was before.) One thing I don't understand (due to my own lack of knowledge) is related to real estate. Japan has been excellent by supplying enough medium and high density housing to keep housing prices relatively low and ensure individuals and families have access to that basic need. Presumably partially because of this (also because people generally don't want used houses), housing there isn't really considered an investment because the house is amortized over a 20-40 year period and demolished at the end of it. For those who know, how does this affect inflation and growth rates? (And feel free to correct anything I'm incorrect about.)
- websites222 6y ago
  Europe yes. US, no. The US is in an amazing position in terms of demography and growth. Aging population, but not immigrant averse like Japan and not an island. The US borders a rising economy with perfect demographics for growth (Mexico). The US is the least involved country in global trade. The US is increasingly disinterested in being the world police, so that capability can be deployed to protect economic interests abroad. We’re headed for global instability, but don’t expect the US to have a fate similar to Europe.
unyttigfjelltol 6y ago
If chartered banks charge for ... holding cash ... don't people next create a new industry of unchartered financial institutions to hold money without charging so much? Like, safe deposit? Or insurance? This seems like an ivory tower exercise that has not yet met the messy realities of the world.
- rcstank 6y ago
  Those already exist. My credit union pays me to store my cash there.
- orange_joe 6y ago
  My understanding is that Dutch banks already have negative interest rates. They charge a negative interest to large account holders (over 1M euros) and a minimal positive rate for less wealthy clients. In reality I suspect that few end up in the 1M+ category since you can spread your money and keep the rest invested in the stock market or T-Bills if you really want security.
  - frockington1 6y ago
    Any idea what happens when T-Bills go negative as happens in Germany? Do people hoard physical cash or gold?
    - orange_joe 6y ago
      I assume you just find rock solid corporate bonds. Apple issues bonds and they have assets far in excess of their debt load + massive profitability. Realistically as an individual you just move into equities. Institutions have different equations. Hoarding physical cash is probably not a good idea, since you have inflation (which probably exceeds the negative rate by quite a bit). It’s worth mentioning that cash holdings in a bank already have negative real growth because inflation exceeds interest (at least in my shitty low interest savings account)
    - after_care 6y ago
      Hoarding highly liquid physical assets like gold or paper requires security which costs money. The negative interest rates are cheaper than buying equivalent security.
LatteLazy 6y ago
Covid plus brexit is a pretty massive recession for us to eat. The current administration is in power for another 3 years minimum and they really have no clue what they're doing so...
imtringued 6y ago
I am honestly unimpressed with the general strategy of central banks to imbalance an economy by only putting inflationary pressure on the supply side. You have to work on both the supply side and the demand side. Doing an excessive amount of supply side stimulus does not reduce the need for demand side stimulus. This is especially important in an economy where a pandemic has forcefully lowered demand for products and thus potential income for workers. American style stimulus checks are a far better idea, especially when they go to people who truly need them. The UK pretty much hit its 2% inflation target back in 2019. There is an obvious slump because of the combination of Brexit and the pandemic at the same time but low interest rates alone are not going to save the UK.

62 points by SpaceNinja 6y ago

Its about time it became normal in the UK for accounts to carry fees. I dont know how retail banking can continue without them. Esp the new fintechs they will have near-zero revenue coming in and have to pay to hold cash.

syntheticnature 6y ago
Negative interest has to deal with lending (and savings) base interest rates, not as a fee per se, but as a tool of monetary policy.
robertnn 6y ago
Why? Many banks are already making lots of money, regardless if you know how they make their money or not. I definitely do not agree that "its about time" to pay for having an account.
- u678u 6y ago
  > Many banks are already making lots of money I think you mean some UK banks made money before rates went negative. The ones that made the most are in corporate and investment banking. Retail is a disaster zone.
LatteLazy 6y ago
Banks' investment/trading arms get substantial tax breaks and one condition is that they have a certain number of UK retail accounts. That's it really.
jaywalk 6y ago
If you go to your local branch and ask to pay some fees, I'm sure they can find a way to accommodate.
- u678u 6y ago
  > If you go to your local branch I dont even have one any more. And I imagine most will be shutting down very quickly now.

stickfigure 6y ago

Can someone explain this, Matt Levine-style? I mean, if someone offered to pay me interest to take out a loan, I'd immediately request MAXINT.

samizdis 6y ago
This isn't Matt Levine style, or calibre, but it covers the basics: https://www.investopedia.com/articles/investing/070915/how-negative-interest-rates-work.asp https://www.investopedia.com/articles/investing/070915/how-n...
toyg 6y ago
The point is precisely that the Powers That Be want you to take out MAXINT - and then unload it on the wider economy as cheap loans to stimulate the economy. Whether that second part actually happens, or banks just use this extra cash to stuff their balance sheets, well... it's a bit of an open question, to put it mildly.
- acapybara 6y ago
  See also: liquidity trap https://en.wikipedia.org/wiki/Liquidity_trap https://en.wikipedia.org/wiki/Liquidity_trap It's when, despite low/negative rates, borrowers prefer to hold cash than to take out loans.
- jbob2000 6y ago
  The biggest problem is that the things people want to buy are in short supply. So the extra money doesn't actually help anything, you just get asset price inflation. I want to buy a house. If everyone has access to cheap mortgages, then everybody can buy a house! But there is a hard limit on how fast we can build housing. Even renovating a home has the same problem. Contractors in my area are raising their hourly rate now because everybody wants their home renovated! But there aren't enough contractors for everyone, so the price just goes up. Look at the video card market. There's a hard limit on the amount of video cards that the industry can produce. That doesn't change if suddenly everyone can afford the $2,500 price tags. The price just goes up by exactly the amount of money people get loaned! And there's a hard limit on the amount of entertainment I can consume in a day. A person has about 16-20 hours a day MAX to consume media. We literally can't listen to any more music, there's not enough time in the day. I can't spend any more money on media because I am physically unable to consume more. I don't see how this would stimulate anything? The reason I'm not buying anything isn't because I can't afford it, it's because it's not available at all! (Probably why the stock market is experiencing volatility right now - it's the only thing providing utility right now)

mensetmanusman 6y ago

Invest in safe-making companies.

CTOSian 6y ago
invest in guns and ammo

ridiculous_lol 6y ago

I wonder if there's an analysis of negative interest rates available across different economies.

jansan 6y ago

So if I take a loan, it would pay itself off after a while?

treespace88 6y ago
I don’t think so. All loans have terms and minimum payments. So if you borrow $1000 over a year at -1% you still have to make $990 in payments, or you will default.
- blackbear_ 6y ago
  So, forgive the ingenuity, what prevents me from taking that 1000 loan, park it in my bank account, and repay the 990 due in a year (earning 10 in the process)?
  - hocuspocus 6y ago
    1) You probably cannot borrow from the central bank. 2) Your retail bank has to make money in one way or another, we haven't seen negative effective rate on personal loans yet, especially on small loans.
  - mattficke 6y ago
    Your bank is going to start charging you interest as well. They might have a teaser rate that's positive up to a certain balance, but there's limits to the arbitrage here.
  - xenocratus 6y ago
    1. Inflation: you will have 10 at the value of the currency in 2022, not 2021 2. Negative savings rates: > There are fears that negative lending rates, which are expected to lower borrowing costs for households and businesses, would force high street banks and building societies to offer negative savings rates. If you put it in your bank account you will lose some of it. The idea is that the bank is paying you to hold the money because otherwise it would have to pay the central bank more than that to hold (some of) it - or at least, that's how I understand it.
  - deleted 6y ago

1experience 6y ago

Can anyone counter my impression that we are witnessing in the Western world the exact same course of events that happened in Japan in the 1990s? (low growth, high debt, ageing population, low interest rates, rising of average P/E ratios). Am I wrong to expect that corporate valuations in Europe and the U.S. will not appreciate in the coming decades as they have in past decades? Edit: Yes, the U.S. and Europe are indeed in different economic positions, the U.S. can still avoid the spiral if it continues to attract skilled immigration and remains a low bureaucracy, easy-to do business environment.

polskibus 6y ago
More importantly, has Japan ever recovered from such state?
- jonpurdy 6y ago
  I'm just a casual observer, but Japan had a "lost decade" post-bubble where average inflation and growth rates averaged 0%, but this has extended to a "lost two decades" now. (Side note: Japan's cost of living has also not increased with the rest of the world, which is why it's much more affordable to travel there these days than it was before.) One thing I don't understand (due to my own lack of knowledge) is related to real estate. Japan has been excellent by supplying enough medium and high density housing to keep housing prices relatively low and ensure individuals and families have access to that basic need. Presumably partially because of this (also because people generally don't want used houses), housing there isn't really considered an investment because the house is amortized over a 20-40 year period and demolished at the end of it. For those who know, how does this affect inflation and growth rates? (And feel free to correct anything I'm incorrect about.)
websites222 6y ago
Europe yes. US, no. The US is in an amazing position in terms of demography and growth. Aging population, but not immigrant averse like Japan and not an island. The US borders a rising economy with perfect demographics for growth (Mexico). The US is the least involved country in global trade. The US is increasingly disinterested in being the world police, so that capability can be deployed to protect economic interests abroad. We’re headed for global instability, but don’t expect the US to have a fate similar to Europe.

unyttigfjelltol 6y ago

If chartered banks charge for ... holding cash ... don't people next create a new industry of unchartered financial institutions to hold money without charging so much? Like, safe deposit? Or insurance? This seems like an ivory tower exercise that has not yet met the messy realities of the world.

rcstank 6y ago
Those already exist. My credit union pays me to store my cash there.
orange_joe 6y ago
My understanding is that Dutch banks already have negative interest rates. They charge a negative interest to large account holders (over 1M euros) and a minimal positive rate for less wealthy clients. In reality I suspect that few end up in the 1M+ category since you can spread your money and keep the rest invested in the stock market or T-Bills if you really want security.
- frockington1 6y ago
  Any idea what happens when T-Bills go negative as happens in Germany? Do people hoard physical cash or gold?
  - orange_joe 6y ago
    I assume you just find rock solid corporate bonds. Apple issues bonds and they have assets far in excess of their debt load + massive profitability. Realistically as an individual you just move into equities. Institutions have different equations. Hoarding physical cash is probably not a good idea, since you have inflation (which probably exceeds the negative rate by quite a bit). It’s worth mentioning that cash holdings in a bank already have negative real growth because inflation exceeds interest (at least in my shitty low interest savings account)
  - after_care 6y ago
    Hoarding highly liquid physical assets like gold or paper requires security which costs money. The negative interest rates are cheaper than buying equivalent security.

LatteLazy 6y ago

Covid plus brexit is a pretty massive recession for us to eat. The current administration is in power for another 3 years minimum and they really have no clue what they're doing so...

imtringued 6y ago

I am honestly unimpressed with the general strategy of central banks to imbalance an economy by only putting inflationary pressure on the supply side. You have to work on both the supply side and the demand side. Doing an excessive amount of supply side stimulus does not reduce the need for demand side stimulus. This is especially important in an economy where a pandemic has forcefully lowered demand for products and thus potential income for workers. American style stimulus checks are a far better idea, especially when they go to people who truly need them. The UK pretty much hit its 2% inflation target back in 2019. There is an obvious slump because of the combination of Brexit and the pandemic at the same time but low interest rates alone are not going to save the UK.