C&B Notes

Euro Cash Piles

A very strange, unintended consequence of negative interest rate policies.

German banks are stuffing vaults with money to help offset the mounting cost of negative interest rates, and some of them are running out of space. The physical cash holdings of German banks rose to a record 43.4 billion euros ($48 billion) in December, according to Bundesbank data published on Friday. That’s almost triple the amount at the end of May 2014, the month before the European Central Bank started charging for deposits and raising the pressure on Germany’s already beleaguered banks.

As the economy weakened last year in the face of international trade disputes, the ECB pushed rates further below zero to stoke inflation in the euro area by making it even cheaper for companies and individuals to borrow. While lenders also benefit from growth, negative rates are a threat to German banks because they rely heavily on interest from loans and sit on a mountain of deposits. “These days it’s better to keep funds in cash rather than park them at the ECB,” said Andreas Schulz, who runs a savings bank close to Berlin. “That’s despite the risk, insurance costs and logistical hassle involved. It’s a ludicrous demonstration of the consequences of the ECB’s interest-rate policy.”

Right now, there isn’t enough space for the cash that many banks want to hold. Pro Aurum, a Munich-based precious metals trader, received several requests from banks to store notes in its vaults. However, the firm had to turn them down because of a lack of capacity. “The ECB’s negative interest rates make hoarding cash attractive,” said Frank Schaeffler, a German member of parliament with the opposition Free Democrats. “This is just the beginning. If it continues, we’ll see a boom for vault makers and security companies.” Accepting deposits to fund loans is at the heart of banking, but European lenders are awash in liquidity and argue that they can’t pass it all on in the form of credit. That leaves them sitting on billions of euros they have to take to the ECB or find another solution for.

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