Swiss, Now Draghi Applies Negative Rates ~ Our Roadmap

Nov 25, 2015

  1. Justin Bilyj

    Justin Bilyj Guru

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    Good article on this subject, which has more long term implications than people are discussing at the moment, i.e. annuity caps, direct interest rate accounts, safe money havens, life insurance caps, and loan percentages, not to mention the greater economy.

    So the Swiss have launched NIRP over there, Draghi is getting ready to Double-Nirp it (and Nirp it good). This is our roadmap and a glimpse of what our future holds.

    But, as we saw earlier this week with The Alternative Bank Schweiz, there's only so long lenders can hold out under the NIRP regime and sooner or later, negative rates will make their way to depositors. That, in turn, has the potential to cause a revolt (i.e. a bank run).

    Would you keep money in the bank if it charged you interest? HELL NO! This could change some deep foundations in financial planning

    Creating a system of exemptions forestalls the application of negative rates to individual accounts and indeed, it may be the only thing keeping Swiss banks from applying NIRP across the board. As Barclays put it, "a removal of domestic banks’ exemption from negative deposit rates likely would force Swiss banks to pass on negative deposit rates as it would increase the proportion of assets charged negative rates to over 20%."

    The ECB's plan "sounds like the introduction of allowances similar to that of SNB or in Denmark," Commerzbank’s Head of Fixed Rate Strategy Christoph Rieger told Bloomberg in e-mailed comments. "If allowances are set properly, the measure should fully impact rates, while still helping banks," he added.

    The interesting thing about the suggestion that the ECB will adopted a tiered system is that Draghi could be telegraphing a larger (i.e. more than 10bps) depo cut. That is, if you figure out a way to mitigate the effect on banks while preserving the "boom" factor vis-a-vis rates, you'll have hit the sweet spot wherein markets will be pleasantly surprised, and banks will be able to tolerate the push further into NIRP.

    But Reuters leaves out the "nuclear option": removing all exemptions from the negative deposit rate. That would mean individual accounts are in danger of NIRP and it would set the stage for the proliferation of negative rates to individual depositors, a dangerous precedent to be sure.

    QUOTE ME ON THIS: If they impose negative rates, there will be a ban on cash.

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