Bank of Ireland and RBS to Charge Negative Interest Rates to Depositors—Remember MF Global?

by Tim Worstall

The varied impacts of the European interest rates cuts are beginning to work their way through the system. In two different currencies, we now have banks charging large depositors for holding their deposits. The zero lower bound is not actually zero, and thus monetary policy is still effective. This also kills the business models of a certain number of financial market players.

Bank of Ireland and RBS to Charge Negative Interest Rates to Depositors—Remember MF Global?

The news is that Bank of Ireland, in the Eurozone, is going to charge large depositors for their privilege in placing money in the bank.

Royal Bank of Scotland, or RBS, is making the same decision in the sterling markets, and HSBC said last year it would start charging other banks for deposits held in currencies where negative interest rates apply.

If people can charge negative interest rates, then zero is not the zero lower bound for monetary policy. Negative rates can only go so far. At some point it will be cheaper to hire a vault and put cash in it rather than losing money by putting it into a bank account. Exactly where that number is is unknown, but some put it at 0.2% or so—minus 0.2%, that is.

The more interesting effect will be upon certain actors in the financial markets, and Worstall discusses what happened with John Corzine and MF Global, which is a general model for execution-only futures brokers. They charge less than the actual cost of broking the futures, but get to keep the income from the collateral put up against those futures. That’s where the profit comes from.

This model falls apart in a world of negative interest rates on short-term deposits. That’s what it did for MF Global, going looking for higher income at the expense of higher risk: risk that didn’t pay out.

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