Banks across Europe are considering the possibility of physically storing cash in vaults as a means of avoiding the charges incurred for leaving money with the European Central Bank thanks to negative interest rates, according to a report from the Financial Times.
As it stands, banks on the continent are effectively paying the ECB to look after their money, paying a fee of 0.4%, and in an era of rock-bottom profitability, these charges are having a big impact.
According to the FT, the ECB’s NIRP has cost European banks €2.64 billion since its introduction.
The ECB has been driving rates further below zero since it first introduced the negative deposit rate in the summer of 2014, with the current deposit rate for banks standing at -0.4%. The basic idea governing negative rates is that by being given a penalty for storing cash with the central bank (in this case the ECB) banks will be spurred into lending their cash, which in turn helps to boost inflation. So in other words, if a bank decided to not lend that money, it would mean it would be losing cash each month by just letting it sit there.
So far, that idea has yet to manifest itself in the eurozone, with inflation still hovering just about zero. Banks are also storing more and more money with the ECB. There is currently around €850 billion (£664 billion; $967 billion) of bank money held by the ECB.
As a consequence of persistently, banks are now looking to more old-fashioned methods of storing their money. Some financial institutions have already started experimenting with keeping physical cash, with Munich Re, the German insurer storing as much as €10 million in vaults.
In early June it was reported that Commerzbank, Germany’s second-biggest lender, was considering storing cash.
Several people familiar with the matter say that Commerzbank is looking to store the cash in order to avoid paying to hold the cash with the ECB, thanks to the bank’s negative deposit rate for lenders, according to a report from Reuters.
Commerzbank has reportedly discussed the idea of vault storage with the German authorities. It is not understood exactly how much the bank would look to store in its own vaults should it do so.
Commerzbank is part-owned by the German state, which has in the past been critical of the ECB’s negative rate policy, with Finance Minister Wolfgang Schauble particularly vocal about what he sees as the ECB’s failings. In April he said negative rates were causing “extraordinary problems” for Germany.
There are however, substantial problems with the physical storage of cash, notably the space and weight of it. Reuters calculations in June showed that €1 billion (£780 million; $1.13 billion) of €200 (£156; $227) notes would weigh more than five tonnes. Currently, there is more than €2 trillion euros in circulation, equivalent to around 10,000 tonnes.
“[Hoarding cash] is in nobody’s interests. It would cost banks a lot and would clearly mean that central banks can’t really do anything to lower interest rates at the moment. Every side wants to avoid it,” a German banker told the FT.