I regularly read that the European Central Bank charges a negative interest rate on money that banks park there. But why would a bank put their money to the Central Bank then? Can't they just keep it in their own bank and not have to pay that negative interest?
The money has to be parked somewhere
The big issue here is that all money has to be parked somewhere.
Contrary to the popular misconception, there's no possibility to store digital money in your own servers (if we exclude cryptocurrencies) - money is "stored in servers" in the form of accounting records for debt; and we call that "money" because a reputable bank (or in this case, the central bank) acknowledging "here's your account balance - we owe you 123456 money" is pretty much as good as cash because you can easily use it to pay others. Those records of debt, "IOUs" are the thing that can get transferred with electronic wire transfers - but all that inevitably results in money that's "parked" somewhere, a balance in some account with another institution.
What are the alternatives?
If we look at the assets in the balance sheet of a typical bank (and ignore irrelevant classes such as office furniture owned by it), then you can think of them as the following large groups (general accounting would split them differently, but this split is illustrative for this problem):
- Loans to customers (mortgages, credit cards, leasing, etc) including net receivables
- Securities (t-bills, bonds, stocks, etc - some of them considered cash equivalent)
- Longer-than-1-day loans to other financial institutions (deposits with them)
- Account balances and overnight deposits with other financial institutions
- Physical cash
So what do you do if you have $100mm extra "cash" in your central bank account, and you want it to not be there? You have to use one of the other alternatives. The first three parts would amount to "getting rid of that money" by buying stuff (bonds/stocks/etc) with it or lending it to someone else.
But if you want to "keep that money", then you have to keep it somewhere. You could keep it at another institution - but other banks aren't likely to give you better conditions than the central bank unless they need cash to fulfil their reserve requirements; if you'd electronically transfer that money to them, what that literally means is that the central bank will take that money (debt) from your account and put that money in their account at the central bank, so the recipient will have to pay the negative interest for that amount at the end of day. So that's not really a viable option.
And the remaining option is to keep that money yourself - which involves withdrawing it as pallets of printed banknotes. It's a possibility (I mean, that's how commercial banks manage their physical cash - by buying/selling it to the central bank or some other bank), but it has certain expenses for transportation and storage. On the other hand, if the central bank rate is negative 0.5%, then that amounts to $14 to store a million dollars overnight. So if you have some extra 10 million remaining there (you'll try to minimize the amount, of course), it's cheaper to just pay the fee instead of sending an armored truck to withdraw it as cash (and bring it back tomorrow when you might need that money for electronic payments).
The reserve requirement (or cash reserve ratio) is a central bank regulation employed by most, but not all, of the world's central banks, that sets the minimum amount of reserves that must be held by a commercial bank. The minimum reserve is generally determined by the central bank to be no less than a specified percentage of the amount of deposit liabilities the commercial bank owes to its customers.
...the higher the reserve requirement is set, the less funds banks will have available to lend out
When central bank wants to fight deflation, it will set negative interest rate, thus decreasing amount of money banks have.
In a sense, "negative interest rate" is a tax on the banks, but instead of going to the government, tax goes to central bank (taken out of circulation), which decreases total cash in the economy.
I don't understand in which conditions banks would keep more money than required by reserve requirement while paying fee for that (see Negative interest on excess reserves ) but answer by Peteris addresses that