Practical analysis for investment professionals
12 June 2014

Poll: Will the Negative Nominal Rate Discourage Banks from Keeping Deposits with the ECB?

Posted In: Economics

European Central Bank President Mario Draghi surprised many last week by reducing the interest rate on deposits to a negative level (−10 bps). So, we asked CFA Institute Financial NewsBrief readers whether negative rates would discourage banks from keeping deposits at the ECB or whether banks might prefer to pay a premium for safety.

Last week, the European Central Bank announced a negative nominal rate on its deposit facility (ECB will now charge 10 basis points on deposits with the ECB). Do you feel that the negative rate will discourage banks from keeping their deposits with the ECB, or is the premium that banks are willing to pay for safety still greater than the 10-basis-point cost?
Poll: Will the Negative Nominal Rate Discourage Banks from Keeping Deposits with the ECB?

Of 627 respondents, a full 50% responded that banks will reduce deposits at the ECB. The other 50% weren’t so sure, with 32% responding that the premium for safety will be worthwhile and the remaining 18% unsure. Some have suggested that the maneuver will encourage European banks to lend more and thereby stimulate the European economy. This unusual situation creates an interesting choice: Do banks prefer the safety of principal and pay a small cost, or do they prefer to lend out their money and place it at risk?

As it happens, in July 2012, the Danish central bank also created negative nominal interest rates (−20 bps). Following the move, both deposits and lending fell materially. What the move did was help the Danish central bank stem the appreciation of the krone (as capital fled the euro) so it could maintain a peg to the euro. A similar outcome in the EU is likely, as domestic lending may be discouraged, and the move should weaken the euro relative to the dollar, supporting exports — notably in Germany.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Ron Rimkus, CFA

Ron Rimkus, CFA, was Director of Economics & Alternative Assets at CFA Institute, where he wrote about economics, monetary policy, currencies, global macro, behavioral finance, fixed income and alternative investments, such as gold and bitcoin (among other things). Previously, he served as SVP and Director of Large-cap Equity Products for BB&T Asset Management, where he led a team of research analysts, 300 regional portfolio managers, client service specialists, and marketing staff. He also served as a Senior Vice President and Lead Portfolio Manager of large-cap equity products at Mesirow Financial. Rimkus earned a BA degree in economics from Brown University and his MBA from the Anderson School of Management at UCLA. Topical Expertise: Alternative Investments · Economics

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