5 ms·
How are negative interest rates implemented?
by madcaptenor 12y ago
How are negative interest rates implemented?
- thingylab 12y agoYou charge for deposits made in the banks' accounts at the ECB.
- deleted 12y ago[deleted]
- ISL 12y agoYou give me money. In return, I promise to give you less money back in the future.
- pyalot2 12y agoIsn't it more like you give me money, and for that privilege you shall now have to pay me more money for as long as I have your money?
- AnimalMuppet 12y agoThat's a distinction without a difference.
- noss 12y agoBut they also provide a level of security that nothing else can offer for that currency. They literally can print more money if they don't have enough to pay you back.
- vesinisa 12y agoThe commercial banks deposit their money in the central bank. Normally, the central bank pays (usually quite minimal) interest to the commercial banks for that money. With negative interest rates, the banks' deposits in the central bank start loosing value, i.e. the banks must "pay" the central bank a premium for holding their money. The desired effect of negative interest rates is that commercial banks more readily give out loans to businesses, rather than just keeping their reserves idle, as the potential returns from successful lending are better. The idea is to inject more money in circulation and stimulate economic growth.
- rmc 12y agoWhy do the commerical banks store it with the central bank? Why not store it themselves?
- mschuster91 12y agoBecause at billion-dollar scale even 0.1% is better than 0%.
- Udo 12y agoNot if it's -0.1%.
- pmontra 12y agoOne of the reasons is the mandatory minimum reserve. Check this http://www.ecb.europa.eu/mopo/implement/mr/html/index.en.html http://www.ecb.europa.eu/mopo/implement/mr/html/index.en.htm... I remembered that reserve existed but I'm a noob at finance so I'm pretty sure there are more important reasons.
- vesinisa 12y agoAFAIK, in modern fractional reserve banking the commercial banks enjoy a special privilege for the balance that they hold at their central bank account. The balance at each bank's account is called its reserve, and for every euro the bank holds in reserve, it can actually lend out a far greater sum. Currently, for each euro at its central bank account, a commercial bank can lend out €100 to their clients (borrowers). (Interestingly, this extra money that the bank lends out materializes out of thin air.) So, the banks still have a great incentive to keep their money at their central bank account, because it's the only account that adds to their fractional reserve base.
- Tycho 12y agoI don't think so: banks are capital constrained, not reserve constrained. There's other types of money that make up their capital base as well as central bank reserves.