On a Key Difference between How the ECB and the BoJ Plus the SNB Have Administered Negative Interest Rate Policy

The subject: a key difference between how the ECB on the one hand and the Bank of Japan (BoJ) plus the Swiss National Bank (SNB) on the other have been administering negative interest rate policy in this cycle.

The powerful bank lobby in Germany has been asking why the ECB does not copy the SNB and BoJ in only charging banks negative rates on a marginal slice of their deposits with the central bank rather than the entirety.

Chief Draghi has not provided a direct or frank answer but admits that the issue is “under review.” His reticence hints at some of the disturbing motives behind negative rate policies.

In puzzling out why the ECB is administering negative rate policy in harsh fashion as regards the banks which are plush with reserves let’s start by identifying what common purpose it could achieve with the BoJ and SNB by keeping to a lighter touch (imposing negative rates on only a small marginal slice of deposits placed with the central bank by its member banks).

This common aim is currency manipulation.

The national money (or union money in the case of the euro) depreciates as a flight of capital occurs out of negative rate assets. All are not equal in this flight. Banks seek to shelter their regular domestic clients from negative rates. They pass on the cost of the negative rate fee on their reserves only to wholesale and foreign depositors, also taking account of the squeezed rates of return obtainable on their other assets including loans and short-maturity government bonds.

In effect the negative rate regime operates partly like a system of exchange restrictions which imposes penalties on foreign inflows into the domestic money market.

German banks are more stressed in sheltering their depositors from negative rates than their Swiss and Japanese counterparts given the harsh treatment of the ECB. In consequence the shelter they offer is less broad and deep and bank shareholders have to pay more heavily for its provision via diminished profits.

Why doesn’t Chief Draghi relent? Because that would mean less subsidy to Italian banks, stupid! The ECB takes advantage of the negative rate fee it charges on deposits (and German banks are the main net creditor of the euro-system reflecting the huge German savings surplus) to make subsidized loans most of all to Italian banks.

If ECB Chief Draghi were just pursuing currency manipulation, yes, he could please the German bank lobby (and the Bundesbank which pleads on their behalf). But he has this second purpose in mind. Hence the prevarication.

Ultimately these transfer consequences of negative rates within Europe (mainly from Germany to Italy) are not a matter for anyone else, including the Trump Administration. German voters should have their say. The aspect of concern for the US is currency manipulation.

—Brendan Brown, “The Menace of Sub-Zero Interest-Rate Policy,” in Anatomy of the Crash: The Financial Crisis of 2020, ed. Tho Bishop (Auburn, AL: Mises Institute, 2020), 41-42.