Negative Interest Rates14 Oct 2020 04:15
Telegraph reporting on negative rates being detrimental to banks.
Negative interest rates have failed everywhere and are the path to Soviet-style banking
If the global experiment with negative rates has taught us anything, it is they are a cancerous tumour on the free enterprise system.
https://www.telegraph.co.uk/business/2020/10/13/negative-interest-rates-have-failed-everywhere-path-soviet-banking/
Five years into the global experiment with negative interest rates, we know enough to conclude that it has destructive anthropological effects and does more economic harm than good.
Negative rates do not stimulate lending for useful economic activity. They damage “good” banks by eviscerating their bread and butter business model, but help “bad” banks play the casino.
They can increase precautionary savings by households and therefore drain money out of the real economy. They stretch public tolerance of overmighty central banks to near breaking point.
A paper last month for the San Francisco Fed issued a withering verdict on Europe’s experiment. “Both bank profitability and bank lending activity erode more the longer such negative policy rates continue,” it said.
Its review of 5,300 banks found that there may be an initial bounce but then “lending declines over the next two years, more than reversing any initial gains. As negative rates persist, they drag on bank profitability even more,” it said.
It is Europe that has drunk deepest from the intoxicating waters of the Pierian Spring, going all the way to minus 0.5pc in a belated attempt to fight deflation, a pathology caused by its own policy errors years ago.
It has done this even though the European Central Bank itself published a paper in 2018 concluding that NIRP tightens economic conditions, is a “negative shock to the net worth of banks”, and “could pose a risk to financial stability”.
It found that banks dared not pass on negative rates to their savers from fear of deposit withdrawals. Those lenders that depend heavily on stable savings deposits – as opposed to more fickle capital markets – tried to compensate for the hit to profit margins by doing two things: they cut lending; and they dabbled in gambling on high-risk markets. In short, they made the whole system more dangerous and dysfunctional.
Professor Richard Werner, a bank expert at Oxford University, said the outcome is progressively ruinous for Germany’s 1,250 savings banks and cooperative lenders, which rely on deposits from savers and have intricate ties with local business.
These banks account for 90pc of lending to small firms (SMEs). They provide credit for much of the Mittelstand engineering and machine tool family firms. Prof Werner said they are the lifeblood of the Wirtschaftswunder, arguably the reason why Germany has had such a successful industrial economy for over 200 years.
“What do negative rates do? They kill the banks. Smaller firms are being gradually frozen out of the lending mark
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