German Response to Negative Interest Rates: Safe Deposit Boxes

Image: -JvL-

Image: -JvL-

The Japanese response to negative interest rates was to buy personal safes. The German response is to pull money out of bank accounts and stick it in safe deposit boxes. Both are perfectly understandable reactions to the prospect of having to pay interest to a bank for holding deposits. It is particularly interesting in Germany, where the Bundesbank a few years ago admitted that the average real rate of return on savings deposits has been negative for nearly the past 40 years. Now that nominal rates have turned negative too, the facade of savings accounts as a safe place to park money to earn a little bit of income has finally been ripped away.

The major risk, of course, is that because of the fractional-reserve banking system, if enough depositors withdraw their funds the bank collapses. If a bank maintains a reserve of 10% and depositors withdraw a total of 10% of their deposits, the bank will have no money left to satisfy withdrawals, pay checks drawn on the bank’s accounts, etc., and will have to cease operating. In fact, even less than 10% of deposits being withdrawn can start to lead to problems with payments. If that were to happen the bank would have to start coming to the discount window for help. If it had to rely on discount window lending enough times, regulators might look to shut the bank down preemptively. If a big enough bank goes down, or if enough banks find themselves in such a situation, panic might set in and result in a bank run, with depositors rushing to withdraw their money while they still can. Witness the situation in Cyprus a few years ago.

That is the risk that the move toward negative interest rate entails, but one which no central bank is willing to admit. It must be sitting at the back of policymakers’ minds, but they probably think that if they don’t discuss the possibility of a total collapse of the banking system then it won’t ever happen. We are in uncharted waters right now, with central bankers who have failed over and over again yet who still possess an unshakable confidence in their own knowledge, expertise, and abilities, the “pretence of knowledge” which Hayek so eloquently explained. A banking system collapse is closer now than at any time previously, and probably closer than anyone suspects, which is why negative interest rates are so dangerous. All it takes is just one more rate cut, one more move into further negative territory to push enough people off the edge, to get them to withdraw their deposits, which will result in a severe banking panic. Central banks are playing with fire when they institute negative interest rates and we’re all at risk of getting burned.

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  8 comments for “German Response to Negative Interest Rates: Safe Deposit Boxes

  1. JdL
    March 19, 2016 at 9:00 AM

    I don’t know anything about German laws regarding safe deposit boxes, but I’d never rent one in the U.S. There are too many horror stories about the government ripping people off, including declaring people dead who are still very much alive, taking their valuables, selling them, and pocketing the money. Also, some U.S. banks forbid storing cash or gold. Also, I’m just paranoid enough to consider that access to safe deposit boxes might be “frozen” due to some government-manufactured emergency, and the owners end up getting back only the contents the government hasn’t ripped off.

    Am I paranoid? Perhaps I am. I wouldn’t put ANYTHING past the U.S. government today, including German-style concentration camps with gas chambers.

  2. John Stathos
    March 19, 2016 at 3:06 PM

    Trouble with safety deposit boxes, at least here in the states, is that they too are now legal for the banks to raid and gouge if they need it…

  3. Tom Jr
    March 19, 2016 at 5:36 PM

    My bank teller I know for years recommended not getting one (I was eligible for a free one with my account). She said I was better off with a safe at my home. Some accounts get frozen and it could take a long time to resolve any issues I have with the government or banking system. So I ask – how safe would you feel with safe deposit box? I’m also not allowed to put coins in there as of new rulings as well. Hum…

  4. sarah
    March 20, 2016 at 3:17 AM

    Concerning central banks:

    Burn baby burn.

    The world is better off without them.

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