what will negative interest rates do?

[frank]

I was what your thoughts were on the negative interest rates that everyone is talking about will do to cd's, interest rates, etc. Will they pull cd's down further than they already are? any othere effects it might have. thanks

frank

 

[DrRoy]

If the US Federal Reserve were to go to negative rates, it would pull other short rates down. Our Fed is currently telegraphing that they are in a mode to raise rates this year. I think the most that would happen here is that our rates might stay flat rather than go up, or they would go up more slowly.

 

[Tadpole]

Negative rates would make me mad whether they do anything else earth shaking or not.

 

[Sunset]

Banks will raise the rates they charge for loans. Already happened in Europe.
Deposit rates will remain as low as they already are with short term ones drifting downward.

Stock market will take this as a sign of deflation, and decrease in value over time.

War will solve this.

 

[Gone4Good]

Banks will raise the rates they charge for loans. Already happened in Europe.

This makes no sense.

Banks pay negative interest rates on money they don't lend. One way for banks to avoid paying negative interest rates is to loan out that money. One way to loan more money is to charge less to loan money (i.e. reduce interest rates).

Now I understand that some folks have claimed that negative interest rates have led to higher lending rates in Europe. I also understand that there hasn't been any rigorous studies teasing out those causes and effects so the best we can say right now is "maybe."

In any event, I imagine the short-run reaction to a new policy like negative interest rates might be quite different from the long-run reaction. In the long run it's hard to imagine a scenario where banks choose to hold excess reserves, refuse to lend out those excess reserves, pay interest for holding those reserves, and then try to make up for the resulting loss by charging more for loans.

Wouldn't it be a much better business model to simply not accept deposits you didn't intend to lend out?

 

[Al in Ohio]

I was what your thoughts were on the negative interest rates that everyone is talking about will do to cd's, interest rates, etc. Will they pull cd's down further than they already are? any othere effects it might have. thanks



frank

Who is "everyone"? The Fed is on course to raise rates. "Everyone I know" heard this in the last news cycle after the Fed convened last month and raised the rate ever so slightly. This isn't Europe. We won't drive on the left side of the road.


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[Whisper66]

This makes no sense.

It just depends on how you look at it. Seems that the banks are just passing on the cost of doing business to their customers. As long as their competition does the same, it makes good sense from the banks viewpoint.

 

[Texas Proud]

This makes no sense.

Banks pay negative interest rates on money they don't lend. One way for banks to avoid paying negative interest rates is to loan out that money. One way to loan more money is to charge less to loan money (i.e. reduce interest rates).

Now I understand that some folks have claimed that negative interest rates have led to higher lending rates in Europe. I also understand that there hasn't been any rigorous studies teasing out those causes and effects so the best we can say right now is "maybe."

In any event, I imagine the short-run reaction to a new policy like negative interest rates might be quite different from the long-run reaction. In the long run it's hard to imagine a scenario where banks choose to hold excess reserves, refuse to lend out those excess reserves, pay interest for holding those reserves, and then try to make up for the resulting loss by charging more for loans.

Wouldn't it be a much better business model to simply not accept deposits you didn't intend to lend out?

Your logic is flawed in one major way.... banks do not want to loan out money to businesses that are not good credit risks.... so, your thinking of lowering rates to lend more money is not logical to a banker... IOW, they are loaning out as much as they can with the credit ratings they like... and interest rates to lower credit rated people would mean higher rates for them....

So, you have deposits and nobody to lend that you want.... now, instead of getting some money for these deposits they are costing you... well, that is not going to happen.... so you have to pass your higher costs of deposits on to the customers with either higher fees or higher interest rates... it is not a stretch to think that higher interest rates are going to be in the mix...

As for just not taking deposits... the large banks can more easily shed deposits quickly as they just do not buy them... but you would be surprised how sticky retail deposits are.... most customers do not shop around for interest rates.... and for someone with maybe $10K to $50K a few BPs will not make them move their money...

So yes, I do believe that they would raise rates if they can.... now, a lot of loans are based on prime or LIBOR.... I just checked and LIBOR has been going up steadily since Oct.... so that kinda confirms they are charging higher rates.. prime looks like it just went up with the FF rate...


London InterBank Offered Rate (LIBOR) History

 

[Sunset]

Your logic is flawed in one major way.... banks do not want to loan out money to businesses that are not good credit risks.... so, your thinking of lowering rates to lend more money is not logical to a banker... IOW, they are loaning out as much as they can with the credit ratings they like... and interest rates to lower credit rated people would mean higher rates for them....

So, you have deposits and nobody to lend that you want.... now, instead of getting some money for these deposits they are costing you... well, that is not going to happen.... so you have to pass your higher costs of deposits on to the customers with either higher fees or higher interest rates... it is not a stretch to think that higher interest rates are going to be in the mix...

As for just not taking deposits... the large banks can more easily shed deposits quickly as they just do not buy them... but you would be surprised how sticky retail deposits are.... most customers do not shop around for interest rates.... and for someone with maybe $10K to $50K a few BPs will not make them move their money...

So yes, I do believe that they would raise rates if they can.... now, a lot of loans are based on prime or LIBOR.... I just checked and LIBOR has been going up steadily since Oct.... so that kinda confirms they are charging higher rates.. prime looks like it just went up with the FF rate...

London InterBank Offered Rate (LIBOR) History

Exactly... saved me a lot of typing.

It's not what the politicians/economists expected, but I guess they didn't ask a business owner what would happen when cost of material when up for all businesses in the same industry. (making loans).

 

[frank]

Al In Ohio: I didn't hear about a rate increase in the last month by the fed. sorry I missed that. could you post an url for that article? And you are right not everyone is talking about it, I just read a couple of articles on the internet at Yahoo. finance. thanks

frank

 

[jim584672]

Can't wait for a mortgage that gives you a credit with every payment. The bank would pay you to have a mortgage. Cool, where do I sign up?

Negative interest rates MAKE NO SENSE, are illogical and insane. Central bankers have jumped the shark and have gone full retard.

 

[Gone4Good]

Your logic is flawed in one major way.... banks do not want to loan out money to businesses that are not good credit risks....

Even if that's true, raising loan prices still makes no sense.

Why?

Because charging higher interest on loans will decrease the demand for loans. Banks will loan less and have even higher excess reserves on which they're paying interest. Raising borrowing costs doesn't fix the problem. It makes it worse.

The proper and I believe the only rational long-term response for banks is not to charge borrowers more. It's to charge depositors.

Raising long-term loan rates in response to negative interest rates on deposits makes no sense.

 

[Tadpole]

If you pay someone to store your stuff overflow, I guess it makes sense to pay to store your money stuff overflow. Many other financial enterprises get a slice, why not bankers. So, since they will have access to money and not issue loans, what will they do with it? Gamble?

 

[Gone4Good]

Negative interest rates MAKE NO SENSE,

Why? Seems straightforward enough . . .

1% Nominal Interest - 2% Inflation = (1%) Real Interest Rate​

(1%) Nominal Interest - 0% Inflation = (1%) Real Interest Rate​

Now let's look at what Central Banks are doing . . .

0.5% Current Fed Funds Rate - 1% CPI = (0.5%) Real Interest Rate​

(0.4%) ECB Funds Rate - (0.15%) Euro Area Inflation = (0.25%) Real Interest Rate​

Negative interest rates make perfect sense. And we've been living with them for nearly a decade already. Moreover, rates are less negative in Euroland than they are in the U.S. even though the ECB has gone negative while the Fed has not.

 

[dallas27]

I think it will affect headlines and talking heads more than anything.


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[Senator]

Your logic is flawed in one major way.... banks do not want to loan out money to businesses that are not good credit risks....

This is true, but they can loan money to the Fed, as much as they can, and get .5% interest rates on that amount. 0% risk. It's not a lot, but it is there.

With negative rates, banks no longer want to put money at the Fed, unless it is part of their required reserves.

Rates are going up. Banks make more money with higher rates, and the Fed is owned by the member banks. Remember, when only one type of (legal) business remains after the apocalypse, it will be a bank.

Some people at the fed think higher rates will start some inflation, which is perceived to be too low currently. Some people think the election may be having some impact as to whether or not the rates get raised, and by how much. Some people think that lending criteria for mortgages needs to be loosened, so more home ownership developed (again...). Some want to raise so that we have more 'bullets' in the Fed's arsenal.

Even if that's true, raising loan prices still makes no sense.

Why?

Because higher interest rates will decrease the demand for loans. You'll loan less and have even higher excess reserves on which you're paying interest.

Banks make a lot more on HELOCs, ARMs, etc. that are already funded. That is the incentive, keep raising rates to continually make more money. Any other business that would base their prices on an indicator like this would be sued for collusion.



No one knows what negative rates will or not do to the economy, but since banks make less money, it will never happen.

 

[Gone4Good]

TBanks make a lot more on HELOCs, ARMs, etc. that are already funded. That is the incentive, keep raising rates to continually make more money. Any other business that would base their prices on an indicator like this would be sued for collusion.
[/B]

Banks can't unilaterally change the terms of existing loans. Floating rate loans typically are priced with a spread to LIBOR. Existing loans will float downward with LIBOR unless that spread is repriced. Borrowers aren't going to consent to pay more (increase their spread) unless the loan is up for renewal, and maybe not even then.

Here's the Euro LIBOR rate for the last year. (Spoiler alert, it follows the ECB Funding Rate negative) . . .

Again, the way to offset increased costs on holding excess reserves is to either reduce your excess reserves (e.g. lend more) or charge depositors who are contributing to your excess reserves. Driving away profitable business (i.e. loans) to maintain unprofitable business (holding excess deposits) is an especially terrible business plan.

 

[Gone4Good]

So yes, I do believe that they would raise rates if they can.... now, a lot of loans are based on prime or LIBOR.... I just checked and LIBOR has been going up steadily since Oct.... so that kinda confirms they are charging higher rates.. prime looks like it just went up with the FF rate...


London InterBank Offered Rate (LIBOR) History

That's the US Dollar LIBOR rate which follows the Fed Funds rate. The Fed Funds rate just increased to a positive 0.5%.

Here's the Euro LIBOR which has followed the ECB rate into negative territory.

 

[VFK57]

Negative rates is one of Central Banks tools to fight deflation what is common in recession(s) and economic slams. The Feds statements on rates increase are always following by "if economic data allows". Let's hope that the Feds projected GDP growth for 2016 is going to be true (2 - 2.5%).

 

[Mulligan]

Stepping away from the central bankers roll, Mr. Market in the present bond world is doing now exactly what we should want capital to do.
Companies with high quality balance sheets have pretty much unlimited access to capital at very low rates. Those that are over leveraged or high risk have been taken to the woodshed by either forced deleveraging or paying through the nose to get the capital. It seems like we are in a very balanced rate environment now.


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[DrRoy]

Al In Ohio: I didn't hear about a rate increase in the last month by the fed. sorry I missed that. could you post an url for that article? And you are right not everyone is talking about it, I just read a couple of articles on the internet at Yahoo. finance. thanks

frank

The fed raised short term rates by .25% in December, but has not changed since then.

 

[VFK57]

The fed raised short term rates by .25% in December, but has not changed since then.

If you watch CD rates, you would know that .25% raising did not change anything in CD market. It states a lot for now.

 

[Texas Proud]

Even if that's true, raising loan prices still makes no sense.

Why?

Because charging higher interest on loans will decrease the demand for loans. Banks will loan less and have even higher excess reserves on which they're paying interest. Raising borrowing costs doesn't fix the problem. It makes it worse.

The proper and I believe the only rational long-term response for banks is not to charge borrowers more. It's to charge depositors.

Raising long-term loan rates in response to negative interest rates on deposits makes no sense.

If you look at my first post you will see that I said they could raise rates on loans or raise fees.... but retail customers will walk if their fees go higher... it has been proven many times.... and you cannot charge them a negative interest rate (well, you could, but it is also like charging them a fee)... so the easiest place to get it back is in the loans.... probably the retail loans more than corp.... but I would bet that corp rates would also go up...

Also, the bank would have to eat some of the cost as a cost of doing business... that is just simple economics...


Since we are not in negative rates here in the US, I cannot ask what actually happens to some people I know...


But, I can tell you that banks pass on some of this cost to corp client... I know that when the crisis hit there was some special fee that was charged to banks for their deposits and it got passed to the company I worked for.... I argued long and hard on that fee as it had never showed up on our analysis, but got nowhere... also, our compensating balances got such little interest our out of pocket fees jumped on our normal transactions...



Edit to add... just remembered way back when (in the 80s) when I was doing some of the rate calculations for a bank... we had a loan category called composite or something like that... it was based on the banks cost of funding. I had to calculate the total cost of funding to the bank and pass it to all the lending depts so they knew what they had to get just to break even... it would have included all reserves set asides and even a negative rate, which when you come down to it is basically a reserve requirement....

 

[VFK57]

I think this article is more accurate description of what is going on at major economies currency war:
Secret meeting at G20 to take down dollar - Business Insider

 

[Gone4Good]

but retail customers will walk if their fees go higher... it has been proven many times....

But isn't that part of the point?

The whole reason banks are paying negative interest is because they have excess reserves. Said another way, they have too many deposits.

So if you're a bank and you raise fees on deposits when the Central Bank is charging you interest on your excess reserves one of two good things happens: 1) You earn back that negative interest in added fees or 2) you lose deposits which then reduces your excess reserves and that reduces the amount of interest you pay on those reserves.

When you raise rates on loan customers, you risk losing them too. Only it's a double whammy because not only do you lose their spread income but the lost loan principal also frees up reserves that get charged interest. You lose twice by trying to pass through negative interest to your loan customers.