June 2, 2015
ft.com
Stashing cash in secret vaults is the sort of activity usually associated with criminals. Now Swiss pension funds are considering getting in on the act. The reason is that they are fed up with having to pay banks simply to park their money in regular accounts and are considering making mass withdrawals, according to ASIP, a trade body.
Welcome to the Alice in Wonderland world of negative interest rates, a topsy-turvy universe where central bankers are so alarmed at the prospect of weak inflation that they have cut borrowing costs below zero, in effect charging financial institutions to leave their accounts in the black.
Policy makers hope that the charges will push banks to lend more to households and businesses, where margins remain quite high.
Lending to businesses rose in the eurozone for the first time in three years in March.
But negative interest rates could also exacerbate the threat that banks and other investors create bubbles by buying riskier assets as they search for some yield.
“Very low rates may push agents in the financial markets to take on excessive risk,” said Silvia Merler, an affiliate fellow at Bruegel, a Brussels-based think-tank. “It is very important that the supervisory architecture in the eurozone is now significantly stronger and that supervisors are a lot more focused on financial stability.”
The European Central Bank last June became the first major central bank to head down the rabbit hole and now imposes a levy of 0.2 per cent a year on deposits that eurozone banks park in its coffers. In Sweden, the Riksbank now pays banks 0.25 per cent in interest a year to borrow from it.
The Swiss National Bank, which levies 0.75 per cent on bank deposits, seems to have cut its rate so low that it is now perhaps nearing the mysterious concept known by economic policy makers as the zero lower bound.
At this level, depositors such as pension funds will try withdraw cash and vault it. In economies such as Switzerland and the eurozone, where the highest denomination notes are SFr1,000 and €500, storing cash carries smaller costs than it would in the US or the UK, where denominations are lower.
“It’s clear Swiss pension funds are being affected by negative rates,” said Hanspeter Konrad, director of ASIP. “It’s unfortunate that we are so limited in what we can do to compensate for this.”
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