6

I saw in the news today that the European Central Bank lowered its interest rate below zero.

My understanding is that this rate is what banks are paid (or if negative, "charged") by the central bank to keep their money for short periods of time.

Thinking about this like a normal depositor, I would still be interested in leaving my money in a bank at 0%, just for the added security. But if the bank started changing me interest to leave it there (i.e. had a negative interest rate), then I would just start storing it under my mattress. But if I didn't want to spend it (lend it, in the case of a bank) when it was on deposit, I probably still won't once it's under my mattress.

Why don't European banks just do the same (I.e. keep the money they aren't lending)? Do they need to store their money in the ECB for some reason, so they're compelled to take the hit of the negative interest rate?

Edit: The press coverage says this move was intended to encourage lending. Instead it just seems like it will encourage a shift in where banks store their money (away from the ECB and towards their "mattresses"). How does it actually encourage lending?

closed as off-topic by user11865, Dheer, JoeTaxpayer Jun 6 '14 at 16:07

This question appears to be off-topic. The users who voted to close gave this specific reason:

  • "Questions on economics are off-topic unless they relate directly to personal finance." – Community, Dheer, JoeTaxpayer
If this question can be reworded to fit the rules in the help center, please edit the question.

  • 1
    What if you had to buy new mattresses? And new bedrooms to hold them? – jjanes Jun 6 '14 at 14:14
  • 1
    The place that banks store money is in the pockets of the people they lend it to. Therefore encouraging storing it elsewhere is encouraging lending. – Kate Gregory Jun 6 '14 at 16:00
  • @BrenBarn The national central banks need to store some money with the ECB (And the national banks with their national central bank) - so they can't just pull it all out (It's called minimum reserve and I'm pretty sure every currency has something comparable). – user45891 Aug 22 '14 at 19:31
2

That is kind of the point, one of the hopes is that it incentivizes banks to stop storing money and start injecting it into the economy themselves. Compared to the European Central Bank investing directly into the economy the way the US central bank has been doing. (The Federal Reserve buying mortgage backed securities)

On a country level, individual European countries have tried this before in recent times with no noticeable effect.

  • 1
    This doesn't really address the main question: why would banks take money they would otherwise have stored at the ECB and "inject it into the economy" instead of just keeping it themselves? – BrenBarn Jun 6 '14 at 5:29
  • 1
    @BrenBarn Banks operate to make profits. What good would it do to them to store money? – littleadv Jun 6 '14 at 6:39
  • 1
    @littleadv has it here. With a negative rate, there is a dis-incentive to store money. In other words, the best you can do from a storage perspective, is keep it in a sock. But doing so is actually a loss due to inflation. The CB rate is normally a hedge against inflationary losses, i.e. better than a sock. – Chris Cudmore Jun 6 '14 at 15:28
  • @BrenBarn What do you mean by "keeping it themselves"? You don't think they can store paper bills in a safe, do you? The way banks keep money themselves is by holding it in the form of a balance at a central bank. – David Schwartz Dec 7 '16 at 21:29

Not the answer you're looking for? Browse other questions tagged or ask your own question.