Daily Management Review

European banks are going all cash


08/16/2016


European banks and insurance companies are considering custody of money reserves in cash as more financially justifiable in terms of further rate cuts, writes Financial Times. If the world’s financial institutions adopt such a practice, it would undermine ability of central banks to stimulate economic growth through use of negative interest rates.



Eurozone’s private banks pay no more than 0.4% per annum on most financial instruments after the European Central Bank cut base rate to 0% in March of this year. It was an attempt to revive the economy by forcing banks to increase lending to businesses rather than just store money in the accounts. Since 2014, banks' losses from low interest rates amounted to € 2.64 billion.

The newspaper tells a story of German reinsurance company Munich Re. It conducted an experiment by keeping eight-digit amount in euros in cash, and recognized the costs reasonable. The second largest bank in Germany, Commerzbank, is already considering the possibility of moving to cash storage.

On the one hand, if banks start storing cash, then they will not be affected by further lowering of base rates, and they will have no incentive to develop lending. On the other hand, the organizations will incur other costs associated with storage and transportation of money. According to bankers, they have a rooms suitable for storage of€ 200 banknotes, which will be the largest after discontinuation of the €500  bill in 2018.

In addition, banks will have to find insurers willing to offer a reasonable price robbery, earthquake, and other force majeure insurance. According to one of the German bankers, the insurance will cost 0.5-1% of par value of banknotes in storage. The publication notes that these costs can be justified given the Swiss central bank’s rate set at minus 0.75%.

FT calculated that a standard brief case has room for $ 2.4 million in € 200 bills. If you insure it at 0.75% per annum, the cost will be $ 18 thousand. 

The newspaper notes that private banks will have to obtain permission from the central banks if they want to transfer deposit in cash reserves. If a sufficient number of banks resort to this practice, it will lead to an increase in cash money.

Meanwhile, financiers are desperately trying to convince people to completely abandon the cash. Some, such as Co-chairman of the Board of Deutsche Bank John Cryan, believe that cash is obsolete and inefficient. In addition, banknotes are believed to be carriers of disease-causing bacteria. According to Cryan, cash will recede into past in 10 years.

His view is shared by government and banks of the Scandinavian countries, which are rapidly introducing electronic payment system in the framework of the "cashless society". Share of cash payments in the Scandinavian countries is already less than 6%.

Similar plans of other European countries encounter protests from consumers and a number of prominent financiers. They see it as an attack on the economic freedom of citizens. Member of the Board of the Bundesbank, Carl-Ludwig Thiele, doubt that restriction of cash payments will help to effectively deal with crime and terrorism. The latter are no longer running around with briefcases of money, but have their own cash payments system. 

Bundesbank’s President Jens Weidmann is also skeptical about the plans to phase out large bills and limit cash payments. He believes that the criminals and schemers would surely find a loophole in these restrictions. Experts say that restrictions in some countries are even meaningless, because criminals operate internationally. Moreover, there are new forms cryptocurrency such as bitcoins. It is also well known that level of corruption in Spain and Italy, which have large restrictions on non-cash payments, is higher than in Austria or Germany. 

source: ft.com






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