By Tyler Durden at ZeroHedge
As The ECB threatens deeper and deeper NIRP, because that’s what the ‘economy’ needs, it seems unintended (though entirely foreseeable) consequences abound. Just three months after Munich Re – the world second-largest reinsurer – started buying gold and hoarding cash to counter negative rates, in order to avoid The ECB’s increasing ‘fees’ for depositing cash with the central banks, Reuters reports that Commerzbank – one of Germany’s largest lenders – is mulling the possibility of hoarding billions of euros in vaults.
Although no decision has yet been taken, the lender has held discussions on the matter with German authorities, said two officials, who asked not to be named because of the sensitivity of the matter. As Reuters reports, a spokesman for Commerzbank said it was not storing cash “at the moment” and declined to comment on whether it might do so in the future, and The ECB declined to comment…
Commerzbank’s examination of storage alternatives to the ECB comes at a time of growing frustration among European lenders with the ECB charge on deposits.
Were it to store cash on a significant scale, it would become the first major European bank to take such a step. If other lenders were to follow suit, it could render the ECB penalty charge policy increasingly ineffective.
The ECB imposes a so-called negative rate equivalent to 4 euros annually on each 1,000 euros ($1,137) lenders deposit with the central bank. This is designed to encourage banks to lend money, rather than park it.
But some banks complain that a dim global economic outlook means there is weak demand for loans on the terms they require, and they have little option but to hoard cash.
Last month, Commerzbank said that the ECB charge had eaten away at its earnings. The German government owns a stake of almost 16 percent in the Frankfurt-based bank, following a bailout during the financial crash.
German Finance Minister Schaeuble said in April that the ECB’s record low interest rates were causing “extraordinary problems” for German banks and pensioners and risked fuelling the rise of euroscepticism in Germany, where voters had flocked to the right-wing Alternative for Germany in state elections.
As the ECB has pumped more than 1 trillion euros of fresh money into the system – most of which has flowed towards countries such as prosperous Germany – banks have been hoarding ever more with the central bank.
Deposits by European banks at the ECB now stand at more than 850 billion euros, at a considerable cost to banks. Demand for loans in the euro zone, where the economy remains in the doldrums in some quarters, has not spiked despite the ECB measures.
There is no limit on how much cash a bank can hold itself.
Such a move is, however, not without costs, such as insurance against fire or theft. German insurer Ergo and other large European insurers say they have received an increasing number of inquiries from banks examining such a move. It also imposes a logistical challenge that ultimately puts a ceiling on the amount of cash that can be stored. Storing 2 billion euros in 200 euro notes would result in a cash pile that weighed roughly 11 tonnes. The cost of moving such large sums in secure transport ultimately prompted Germany’s regional savings banks to decide against storing cash.
So, to sum up, it would appear that a policy designed to encourage banks to lend money is instead forcing them to hoard it…
And, as we noted previously, “This may well become a mass phenomenon once interest rates are low enough — the only question will be where that exact point is,” said Christoph Kaserer, a professor of finance at the Technische Universitaet in Munich. “For large institutions, that may be the case sooner rather than later. The ECB will react with countermeasures, such as limiting cash.”
As Bloomberg adds, Munich Re’s strategy, if followed by others, could undermine the ECB’s policy of imposing a sub-zero deposit rate to push down market credit costs and spur lending. Cash hoarding threatens to disrupt the transmission of that policy to the real economy.
Munich Re, which oversees a total of 231 billion euros in investments, wants to test how practical it would be to store banknotes, having already kept some of its gold in vaults, von Bomhard said. This comes at a time when consumers are increasingly using credit cards and electronic banking to pay for transactions. Deutsche Bank AG Chief Executive Officer John Cryan has predicted the disappearance of physical cash within a decade.
“This shows the difficulties that the ECB is facing in its efforts to stimulate the real economy,” said Andreas Oehler, a professor of finance at Bamberg University in Bavaria. “Charging negative rates on overnight liquidity doesn’t stimulate longer-term lending. All it does is make companies’ and institutions’ payment transactions more expensive.”
Incidentally, once the Fed’s infatuation with playing central planning doctor fizzles as the economy relapses into an accelerating downward spiral, negative rates are coming to the US next, as such the real-time experiments of how to evade a repressive monetary regime such as those conducted by the Munich Re CEO and now Commerzbank’s management will be particularly useful to those who want to protect their assets once NIRP crosses the Atlantic.