they should not be forced to invest their money in a massively over-leveraged peak stock market that could crash any second. I think it’s fair to be able to cash in your chips at any point and not have to pay a fee for that every single year.
Which is the behaviour the negative interest rate policy is intended to encourage.
The article also fails to mention that bank deposits are only gauranteed up to 100k as well, so if you have a bunch of cash sitting around it is wise to spread it around different institutions anyway.
Which is the behaviour the negative interest rate policy is intended to encourage.
I’ve never quite understood -- can’t the bank do that for you?
If the obstacle is that savings accounts are expected to have a guaranteed rate with zero risk, the banks ought to provide very easy access to investment accounts, with the ability to move money around frictionlessly.
Is there just no demand for that kind of service, or regulatory problems, or something of that kind?
Edit to add: I always felt that offset mortgages (https://en.wikipedia.org/wiki/Flexible_mortgage#Offset_mortg...) were a nice solution to this problem; it gives you a place to stash your savings and get a reasonable rate of return (basically matching your mortgage rate) while still being accessible if needed. But they seem to have gone out of fashion again, at least in the UK. Anyone know if there was some problem or disadvantage (either to consumers or to the banks)?
> I’ve never quite understood -- can’t the bank do that for you?
You want them to tell you you have a fixed, gauranteed rate of return and use it to buy some apple stock or some bitcoin with it?
The answer is they can do it for you, they do, do it for you, but you have to sign up for the gambling account not the instant access cash savings account.
Well... yes, sort of! Or at least, it’d be great if the bank let you choose how much money to put in a safe account with low but guaranteed interest, and how much in an investment account with higher but risky interest; and make it really easy to move money back and forth. I don’t know of any bank that offers anything like that.
I guess there ought to be some safeguards, e.g. at least XX% of your money in a safe place. But there’s a point at which safeguards become friction that just stop you investing at all.
For example, in the UK you have ISA accounts, which should work like that, but the restrictions are so annoying (yearly cap on deposits) and the benefits so weak (tax exempt, but on a pitiful interest rate so it makes no difference for most people) that they’re not very useful. Unless I’m missing something.
Natwest.com ...
Products: Bank Accounts, Mortgages, Savings, Investments, Loans ...
Your investment options are limited to actual investments basically, so essensially shares. Term deposits dont seem to be a big thing in the UK for whatever reason, and we dont have the US tax breaks to buy municipal bonds etc.
ISA's are great, you can go buy some apple stock or some FTSE funds or depending on the provider one of 1000's of funds with it. 'Cash ISAs' while rare are still around are no better or worse than a savings account (IMO).
Perhaps they need the money liquid? Or the risk reward ratio is not good? Or they don't have a CFO that can do treasury and the opportunity cost / effort is not worth it?
Investors want their business growth and a 10 bagger (or bust) on their money, not paying a c-suite salary for 0.01% interest, or worse, a bunch of greek bonds that someone on the sales desk at Goldmans said was a great buy.
Government bonds? Corporate bonds? Stocks? Crypto?
Are you willing to cover their potential losses with government guarantees?
Savings accounts are supposed to be a safe storage of money. They have certain insurance guarantees because of that. Encouraging banks to use that money to speculate is exactly what you don’t want them to do. Savings banks are not known to employ the most brilliant investment minds.
yeah but realistically will any person ever lose assets in a bank? I know in the 2008 crisis they made (or maybe it was just they said they would make) any personal accounts good; if it was over the limit (I think that's FICA) or not.
Yes, it actually happened in The Netherlands a bit over a decade ago, after the financial crisis. If you had more than 100k in savings in there (and they were known for their attractive savings rate), you would be in trouble.
Are the two that come to mind. Cyprus deposits in a couple of banks in 2013 above 100k were lost I believe. Icesave played out badly in the UK in 08, quite a few councils etc took some nasty lossses.
Either way, waiting for multiple years, winding up and down of court cases, bankrupcy proceedings etc to find out if the rest of your money is gone or not is not much fun.
The kind of person parking a couple of 100k in cash accounts is almost by definition risk averse.
Worth pointing out that sometimes multiple banks share a license (usually when new entities want a bank-like product and white-label an existing bank) and then you’re only covered for 100k per license. In extremis, you can have many bank accounts but only be covered up to 100k total, if they all map to the same license.
My bank account's got robbed by European Commission. Over 700k is lost.
The most of circulating assets on our business Current Account are blocked.
Over 700k of expropriated money will be used to repay country's debt. Probably we will get back about 20% of this amount in 6-7 years.
I'm not Russian oligarch, but just European medium size IT business. Thousands of other companies around Cyprus have the same situation.
The business is definitely ruined, all Cypriot workers to be fired.
We are moving to small Caribbean country where authorities have more respect to people's assets. Also we are thinking about using Bitcoin to pay wages and for payments between our partners.
Special thanks to:
- Jeroen Dijsselbloem
- Angela Merkel
- Manuel Barroso
- the rest of officials of "European Comission"
P.S. The worst thing is, that even a month ago I was suspecting that things can go wrong. In February, I several times called my banker and lawyer and asked them if money on the account is safe, mentioning that article in Financial Times. But they convinced me that there is no reason to worry, and even if country goes default, in no way current accounts may be affected. "This is European Union and banks here can't just grab your money and go" I was told.
I got a hard lesson and now I know the meaning of phrase "TRUST NO ONE".
(...)
The stealing of my money is now finalized.
Yesterday I looked at my Laiki account and found that frozen amount is not more shown on my balance.
100% of frozen funds is now appears as outgoing transaction to nobody with comment "DECREE".
Also there are some news from lawyers.
Quote
The Supreme Court has not announced its decision yet. It examines preliminary objections raised by the Attorney on a basis that the Law and the Order are political acts of the state (like decision to start war) and therefore cannot be examined or controlled by the Supreme Court and that the matter in issue should be considered as a private and not a public law matter.
Also, there is recent translation of the "Capital Controls imposing DECREE"
[ 2013-07-10 10:49:23 PM Update ]
"Blocked Funds" amount has finally disappeared from our Laiki account. Bank told me it's "waived" (their interpretation of word "stolen"). We won't receive any bank shares as compensation for confiscated amount since the bank is liquidated.
The rest of the money (100k EUR) are still subject to Capital Control and we can only transfer 5K monthly.
Today I had a conversation with a manager from Laiki Bank.
He has been honest and confirmed that we may forget about anything over 100K as it's already spent to pay country's debts. Also, I was warned that the financial situation in the country is getting worse and worse and we should be ready to lose even part of insured (under 100K) money during this year (this is why they keep capital control enforced).
By the way, this style of "bank restructuring" is going to be adopted in the whole European Union.
Soon, everyone's uninsured money (over 100K EUR) in EU banks will be at risk of seizure.
Many people though like you they are protected in the EU... Until Cyprus declared in 2013 they will confiscate money even from accounts with less than 100.000 EURO due to their financial crisis in 2013. Later, they reverted that decision, because the EU was scarred by the consequences and decided to help Cyprus overcome the crisis.
There is a EU directive that require certain guarantees from the member states. Citation from wikipedia:
Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes[11] requires all member states to have a deposit guarantee scheme for at least 90% of the deposited amount, up to at least 20,000 euros per person. On October 7, 2008, the Ecofin meeting of EU's ministers of finance agreed to increase the minimum amount to 50,000. ...
This does not work in Denmark.
Banks know officially whether your bank account is your "living wage" bank account or not.
If you have a bank account that is not the 'wage deposit' account, banks have started charging a premium for HAVING an account with them.
I used to have several accounts, but since they've started with this extra-fee crap, I have closed all except my main account, because the fees would eat the deposited money.
There may be ways around it, but I haven't found it.
Revolut does work nicely for this - and has the side benefit of allowing SWIFT transfers to DK accounts. This is something bizarrely that some traditional banks (looking at you Danske) don't allow.
Also in DK, the limit for being charged negative interest is generally 100,000 DKK ~ €13,500. With IT salaries it can become a monthly hassle dealing with it.
But I was talking about the "premiums" for not being the main account. Not the negative interest for having a large amount. If N26 and all the alternatives allow up to 50k with no negative interest, then the problem from the intial comment can be solved
> What about N26, Revolut and all these new online banks? They don't charge anything where I live in the EU. I don't have 100k though.
Most (all?) online banks I've seen will charge negative rates.
But ultimately the "if, how and when" is a commercial decision for the bank.
Some of them set higher cut-off levels (e.g. 50k vs 100k vs 1m).
Some of them segregate by account type (e.g. higher cut-off for retail clients than for business customers).
It might well be that some of them have a "fair-use policy" where they silently "eat" the negative rates but will quietly invite you to pay or move elsewhere if you have a large balance.
Can you have your employer split up your paycheck into multiple accounts? Account fees being waived when you have direct deposit set up is common in the US as well, but I can have my paycheck split into up to five accounts, so they all qualify.
Do it! Also, why not program periodic circular transfers across a month, of let's say 100€, just for fun! For extra fun, include words in the description like Iran, Kabul, and North Korea :D
Negative rates have been around since 2014. And this "trick" of opening multiple bank accounts has been exploited across the EU for pretty much the same period of time.
For example, I've frequently done business with German companies. They don't even hide it. It is not in the slightest bit uncommon to receive an invoice with four or five EUR bank accounts printed on it. You can randomly pick your "preferred" account to pay to and the company's accountant will rebalance the accounts at the end of the quarter (or wahtever).
Having multiple bank accounts isn't usually a thing to avoid negative interests in Germany. It's that payments between banks took three days to settle (I think they're down to 1 day now), while payments between accounts at the same bank usually settled immediately.
It's much easier to have multiple accounts with the largest banks so most of your customers can use bank-internal transfers.
Also, it's usually a good idea to have a backup just in case something goes wrong with your primary bank account. Dealing with bureaucracy is bad enough, dealing with it while you're also unable to send or receive payments is way worse.
SEPA is more relaxed than you might think. N26 has a nice explanation [1]:
> ...[A]ll standard SEPA transfers should arrive within a maximum of 2 working days. Keep in mind that if a transfer is made just before a weekend or holiday, the time frame will be extended to a maximum of 3 working days.
> You’ve probably heard that all SEPA transfers have to be completed within one “banking day,” so let’s clarify what that means—one banking day is equivalent to two working days due to the opening hours of the banks involved. Any weekday that is not a holiday is considered a working day.
Jikes, I am kind of used to swift transfers taking 1 day these days, let alone sepa, that should be max minutes. And I have not seen them take more for quite a while. Did not know it was that different in DE.
It's not great in DE for bank transfers. Either the account does not support sending SEPA instant or it's quite a large charge. Often savings accounts don't seem to be acceptable as destination accounts for SEPA instant.
AFAIK they have a limit of "at most one working day" since a few years ago. Which, in case of weekends, may still be several days. Because computers dont work on weekends!
> It is not in the slightest bit uncommon to receive an invoice with four or five EUR bank accounts printed on it. You can randomly pick your "preferred" account to pay to and the company's accountant will rebalance the accounts at the end of the quarter (or wahtever).
Why ask the customer to pick? Why not generate invoices with a randomly picked bank account (which can also lend itself to automatic rebalancing)?
> Why ask the customer to pick? Why not generate invoices with a randomly picked bank account (which can also lend itself to automatic rebalancing)?
Maybe its just my perspective having (mostly) dealt with SME's. I would guess larger companies are more clever about it (e.g. perhaps they have one "receipt" account and then the money gets automatically spread out from there once received).
If you send a different bank account every month to many companies, it’s going to get flagged by fraud checks in a lot of ERP/AP systems. (We have vendor records, including the payment bank account number. If your invoice matches and passes internal checks [we received the goods, we have money in the cost center, address/account numbers match, etc], it gets smoothly paid as agreed. If you rotate bank account numbers, it’s going to be kicked out to be manually checked and you’re going to get paid late.)
You could load-balance once per-customer and not trip this, but that doesn’t get you fully automatic rebalancing.
Also smaller less sophisticated vendors (I include my company in this) simply enter your remittance information once in their banking system on the first invoice. We aren't going to want to update it every time.
They could have it randomize per vendor I suppose but all that is a lot of hassle when you can just put five accounts in the Payment Advice field in your accounting software and let the vendors do with it as they choose.
> Why ask the customer to pick? Why not generate invoices with a randomly picked bank account (which can also lend itself to automatic rebalancing)?
Would be interesting to learn if they give the list in the same order always or if they randomize the order of the account numbers listed, DNS round robin style :)
One more reason that comes to mind. Customers probably would choose the account in same bank as they have their account. Thus instant transfers. Which used to mean getting money possibly days earlier.
One reason is that a money transfer within one bank is usually faster and might be more secure because some banks check the name agains the account number. For this reason customers perfer to use an account with their own bank.
Why ask the customer to pick? Why not generate invoices with a randomly picked bank account (which can also lend itself to automatic rebalancing)?
The simple answer to this is because "Payment Advice" is a big text field in your accounting software and "Randomize per invoice" or "Randomize per vendor" isn't an option it has.
UK business here.. we do the same because the UK equivalent guarantees bank accounts (even for businesses) at £85,000 (~$120,000) each. I have no idea what businesses with huge cash reserves do as you can quickly run out of banks.
Also worth noting that when a bank operates under multiple names, such as First Direct (part of HSBC) or Cahoot (a division of Santander), the cover applies to your total balance across all accounts, regardless of the name.
So it's worth knowing which "banks" are really just different different brands of the same parent institution, if you're trying to diversify because of this limit.
_If you have money in multiple accounts with banks that are part of the same banking group (and share a banking licence) we have to treat them as one bank. This means that our compensation limit applies to the total amount you hold across all these accounts, not to each separate account._
Further to what other replies mentioned, when a bank (or in the US a brokerage account) will do is actually sweep your cash balance into different account spread across multiple banks.
> I have no idea what businesses with huge cash reserves do as you can quickly run out of banks.
To take an extreme example, imagine running Apple’s reserves. It’s probably close in scale to the finances of a fairly large country (and considerably more profitable).
It's an especially interesting statistic because GDP is calculated as money velocity times supply. Meaning, each time a unit of currency changes hands in any purchase, it counts towards GDP.
That means Apple, one entity, receives (not including spending) as much money as every single transaction that occurred in the entire country of the Czech Republic in a given year. Any people say Apple is overvalued...
Not that individual depositors get a say, but isn't this (the consolidation of banks to relatively few players) the larger source of risk?
In the US, my understanding is that there are a lot of small local banks, but that they are all dependent clients on a much smaller number of larger banks. If I go to my local credit union, I don't think I have a straight-forward way of knowing which mega-bank they depend on, if any. If "per-bank" limits are meant to spread out risk, isn't this undermined by consolidation? Or do I misunderstand the structure of mutual dependence between banks?
I get that this is pedantic, but the first bank in Canada was established in 1817. While that's just over two centuries ago, that wasn't a "branch bank", it was literally the first bank in the country.
I'd ask for sources if you want to make claims that broad.
But so your view is that small banks are prone to instability in virtue of being small. I get that with many banks, the probability that at least one has problems increases to 1. My hypothesis was that large banks are risky in virtue of being concentrated; though in most years they may all be fine, occasionally big bets made by a single institution can impact a large minority of depositors. I suppose in a context where the state is prepared to prop up banks in times of crisis, perhaps propping up a few big ones is less complex than trying to support many small ones?
Big businesses use current accounts for day-to-day operations. For savings, they have access to a variety of securities which they can liquidate overnight and might pay them some interest.
Of course, this is not limited to big businesses. You can do the same with an IB brokerage account but I guess the added complexity is what puts people off.
I think as far as FDIC and the like go, that's probably the intention of the policy. Less money for them to cover if a bank goes bust and the country has diversified its savings.
Also, FDIC was designed for everyday folks, not wealthy families or large investors. Exceedingly few people have that much cash on hand.
Wealthy people opening multiple accounts to stay under the FDIC limit is just an example of folks finding a loophole to receive a government benefit that was never really intended for them in the first place.
Most wealthy people don't put all of their wealth in a cash account that earns them no money. Sure, they might have some largish amounts in cash, but the majority of it will be invested making more money.
If you are extremely wealthy it wouldn't be a surprise to need more than that limit in your bank accounts just to cover ongoing expenses. A couple large mansions, each with staff to pay... Of course you probably want those in separate accounts anyway just in case some staff defrauds you - they only get the one account.
For instance, I keep $XX,000 in my bank account but a negative $XXX,000 balance in my brokerage account.
And I'm not particularly wealthy.
This way I have an isolated cash cushion buffer separate from my investments, and I don't really care what, if anything, that money makes. It's actually invested in my brokerage account, at a [edit](1.25%) margin APR, that's tax deductible - and offsets my capital gains.
[edit] correction: I double-checked, I guess I'm paying closer to 1.25%. Looks like margin rates are both up at IBKR, and my recollection was off. Thanks for the spot-check throwaway2037. It's hard to find the historical rates, too.
AB: 75bps for equities lending (I assume). Woah! I assume you are not ultra high net worth (UHNW) @ >100M USD. Where can you borrow so cheap? Interactive Brokers? Please share!
Yeah that’s why I use them. A lot of the retail brokerages will offer more competitive rates if you push them on it but it’s really unlikely they’ll do better than IBKR so why bother with the negotiation?
They're also the ones who benefit most from low rates by forcing everyone else to put money into investment vehicles they control and giving themselves cheap loans for financial engineering.
I think it's a bit far to say it was never intended for them. Likely the intent was just for people not to have to worry about the money they had in banks disappearing. Even more likely, if enough people had wanted the FDIC limit to be per depositor and not per bank it very easily could have been.
If you want to keep the banking system stable, it's good to keep some skin in the game for depositors.
There's always government bonds (and money market funds that invest in government bonds, and narrow banks that only invest in government bonds etc) for people who want as much of a guarantee as FDIC can give you.
Expectations about what happens in the future drive behaviour in the present.
Or more concrete: without something like FDIC banks have some incentive to arrange they balance sheet in such a way that it's (a) safe, and (b) simple and transparent enough to convince customers that it's safe. Customers have an incentive to look for banks that are simple and safe.
(Customers don't have to do the balance sheet analysis themselves. They can rely on third parties.)
With something like FDIC, customers don't care how risky their bank is. In fact, more risk is better if that ever so slightly raises the returns available.
(FDIC charges insurance premiums, but they are not properly risk adjusted.)
If natural incentives obviated the need for the FDIC, we would not have the FDIC, because both banks and incentives pre-date the FDIC by hundreds of years. It was created for a reason.
note that the FDIC was created AFTER the Fed, so you don't know that the reason isn't that "the fed fucked things up and created an economic environment that necessitated the FDIC".
In the regulatory environment of 19th century Canada or 18/19th century Scotland, they could have.
And those places had very stable banking systems during that time. The Canadian experience is especially instructive when compared to its tightly (but fragmentedly) regulated neighbour in the south.
In any case, 'strict' but fixed regulations but shielding customers from consequences just leads to gaming of the regulations.
It's better to give customers (and other stakeholders) skin in the game, and reduce the regulation to perhaps a duty to disclose truthfully. Then customers can police their banks.
Your plan literally never works. It simply never works. It’s a lovely theory that in the real world doesn’t yield results.
You get shit like Nikola, like Theranos - all that had sophisticated accredited investors looking at the books, not just randos, and look how that turned out. Ones dead and the other is pushing cars down hills in PR stunts worth billions in market cap.
The directionality around regulation is clear: without it, rivers caught fire. Then we got environmental regulations and lo and behold, no river fire. The idea that customers can just police the environment is equally baseless. Customers aren’t experts in finance or the environment. That’s why we delegate the work to a group of experts who are.
Banks are too important to yolo. Retailers can get their risk on elsewhere.
Do you not think that there are demonstrably far more situations where regulation prevents adverse outcomes than situations where deregulation does? In my opinion, certain parts of the economy should be carved out and regulated carefully - even socialized - so that it can foster a thriving free market in the rest of the economy. Banking being a core aspect should be as boring, regulated and measured as humanly possible in support of this goal.
Do you not agree that the average individual is not an expert in what makes for a successful banking system? If that's the case why would you leave it up to them?
I agree I overstepped when I said it "never" works - generously, I was being hyperbolic, however cherry picking a few good outcomes doesn't a blueprint make, IMO.
> In this book, Robert Anderson, a development consultant and former World Bank economist, recommends a different approach. Instead of adopting policies that are common in rich countries, Anderson suggests that policymakers take into account the institutional weaknesses typical of developing countries - corruption, deficient rule of law, cronyism, and so on. Simpler, market-oriented policies are more suitable to poor countries institutional environments and more likely to produce growth and keep the private and public sectors honest.Anderson recommends sometimes counterintuitive policy solutions for a number of areas - banking, privatization, corporate governance, bankruptcy, and competition. For instance, he argues that "rich countries were once poor countries" and that "examples from the past in rich countries may be more appropriate for poor countries today."
I chatted with the author a bit. Many of his suggestions are useful for rich countries as well.
The argument starts from the observation that honest and competent civil servants are one of the most precious commodities a country can posses. They are in limited supply, and should be used wisely and sparingly.
To give an example from child rearing: instead of the parents always intervening for how to share, teach your kids the divide-and-choose rule. https://en.wikipedia.org/wiki/Divide_and_choose
Similarly, in the US there are essentially two kinds of bankruptcies: chapter 7 and chapter 11.
Simplified, in chapter 7 the business just gets auctioned off, and proceeds go to the creditors.
In chapter 11, the business keeps running mostly under old management, but with lots of micromanaging from a court.
The former is rather simple. The latter has lots of opportunities for incompetence and corruption.
The author suggests not implementing something like chapter 11.
> Do you not agree that the average individual is not an expert in what makes for a successful banking system? If that's the case why would you leave it up to them?
The average individual is not an expert in making shoes. But we allow everyone to manufacture shoes.
Customers are by and large wise enough to buy shoes from competent producers.
Historically, for banking it turns out that regulating them like shoe factories works really well. Adding special regulations just leads to lots of gaming of the system, and to regulatory capture and suppression of competition etc.
From a game theoretic point of view, governments also have a hard time committing themselves. Eg committing themselves to paying back their debts or not issuing too much of a currency even in emergencies.
That's because governments are, in a sense, too powerful.
A normal company can bind itself with contracts, and they will be enforced in court.
A government can try to do the same, but they can always pass a law that makes the old contracts void.
For small accounts, the FDIC premium levied on the institutions is sufficient skin in the game. It goes up during volatile times. I’ve been in meetings worrying about it. The other skin a bank has is making sure its loan and fee business keep up with savings and is sufficiently risk-managed. This pressure regulates the accumulation of large savings accounts.
FDIC doesn't charge enough, and doesn't charge not differentiated enough. (No fixed regulation could charge the right amounts. You'd need competing private insurance companies to get a better approximation for that.)
Of course, even if the FDIC doesn't charge enough, you'd still have meetings about how to game the system so that your bank pays less. It's still a cost to the business.
Good point about the lack of differentiated underwriting. The costs are plenty for small institutions though. Other than perhaps raising money market rates, there aren’t any meaningful gaming levers to pull other than keeping the loan and fee business healthy (right mix of promotions and upsell prompts by tellers.)
In 1934 (the year after the FDIC was created) the FSLIC was created[1] (Federal Savings and Loan Insurance Corporation). It served the same purpose as the FDIC, but for financial institutions incorporated as Savings and Loans rather than Banks.
By 1980, the FSLIC insured approximately 4,000 savings and loan institutions with total assets of $604 billion.[2] They failed en-mass. By 1982 the net worth of the entire S&L industry was approximately 0.[2] Yet we did not have a major "run on the banks" like we had seen during the Great Depression.[3] Under federal control, the FSLIC closed or converted essentially all remaining S&Ls and that industry ceased to exist -- but WITHOUT individual citizens losing all their savings.
This was the very reason that the FDIC was created in the first place. A complete collapse has already happened once (albeit with the FSLIC, not the FDIC). FDIC regulation affects the kinds of risks that banks take even today. In fact, most every year, there are a few banks the FDIC is forced to take control of and liquidate (their ultimate power).[4]
The FDIC is VERY much a useful institution. We have chosen to expect major investors and regulators to assess the stability of banks, but to insulate individual consumers from doing so by removing their "skin in the game" and personally I believe that is the right decision as those individual investors don't have and could not obtain the information they would need to make wise choices.
The counterfactual here is that without the government back-stopped insurance, customers would have had an incentive to push back against the banking behaviours that led to these mass failures.
> Federal deposit insurance, which was extended to S&Ls in 1934, was the root cause of the S&L crisis. Deposit insurance was actuarially unsound from its inception, primarily because all S&Ls were charged the same Insurance premium rate regardless of how safe or risky they were. That is, deposit insurance provided by the federal government tolerated the unsound financial structure of S&Ls for decades. No sound insurance program would have done that. Congress tried to rectify this problem in 1991 when it directed the FDIC to begin charging risk-sensitive deposit-insurance premiums. However, because those who should pay the most would scream the loudest to Congress, the FDIC’s premium structure still does not charge the riskiest banks and S&Ls enough. Much of the time, the “drunk drivers” of the S&L and banking world pay no more for their deposit insurance than do their sober siblings. Those who do pay more still do not pay enough.
The article goes on to talk about regulation Q and other regulatory choices that contributed to the crises.
The point you raise here about how regulatory choices contributed to the crisis is spot on.
But when you say this:
> customers would have had an incentive to push back against the banking behaviours that led to these mass failures
I'm not persuaded. Do you think that customers would have gotten savings and loan corporate officers to provide them with detailed documentation of the S&L's risk portfolio and then would have analyzed this in detail and chosen where to save their money based on the results? Because I don't believe ANY customers could have done that. As you point out, regulators didn't even do that, and they are experts whose full-time job is to do this kind of analysis!
Customers wouldn't generally do this themselves. They would outsource the job. Ie look for what reviews suggest etc.
I can dig up how that worked in practice in the free banking eras in Scotland and Canada.
> As you point out, regulators didn't even do that, and they are experts whose full-time job is to do this kind of analysis!
In general the regulatory regime for banking is a bit weird in this respect:
The government tends to give minimum quality standards for the balance sheets of eg banks, and then hands out an implicit (or explicit) guarantee that anything meeting these minimum standards is fine.
In the regime I am suggesting the government would at most force banks to truthfully disclose what's on their balance sheet, but would not put up any minimum requirements.
What happened in practice in Scotland and Canada is that banks would have very low reserves, for every 100 dollars in deposits and notes issued, they would keep around 2 dollars in gold around. (The equivalent today would be central bank reserves.) Basically, just enough to meet redemption demands in the short term.
But to make up for that, they would keep very thick loss-absorbing equity cushions. Typically about one third of their balance sheet were financed by shareholder equity, and the other two thirds with deposits and bonds etc.
Banks also put these equity cushions in their advertisements to prospective customers. So it seems they believed that customers cared about them.
In some instances, shareholders and directors were also personally liable for losses beyond their paid-in capital. (Ie no limited liability shield for them.)
Interesting enough, the latter is also how eg Goldman Sachs used to be run when it was still a partnership and not a public company.
Like cameronh90 said, it limits the liability to the government by capping the payout by the number of account holders, which is finite. The assets that could be held there otherwise are theoretically infinite. So, this is smart government policy for institutional protection, not some kind of progressive giveaway.
Someone with a lot of cash can obtain private insurance more cheaply than the cost of managing deposits in dozens of banks. Multiple deposit locations are more of a convenience and a relationship building approach. You do see some people try to “game” FDIC/NCUA with $249k in each bank but they are generally either eccentrics or elderly people who only invest simply and are afraid of disasters. It’s up to the bank to do loan and fee business proportionately to their deposits and these kinds of accounts are factored in. No harm done.
> Exceedingly few people have that much cash on hand.
Minimal comfortable retirement at 65 requires is what, ~ 1M USD in assets? What the FDIC rule implies, is you can't do this in cash. So obviously, inflation makes it stupid to do that in cash, but even without inflation this FDIC rule basically forces you into playing the wall street game (aka subsidizing rich people) in order to retire comfortably. Think about that!
Of course, in our economy inflation is real, too, so pretty soon they are going to have to increase this to beyond $250k even.
Historically, multiple bank accounts at different banks in Germany were a way to speed up payments, in a time when wire transfers were dependent on local distance and different banking networks which exchanged wire transfer data on magnet tape in central bank parking garages (and thus were called "Garagenverfahren"). Which ended not too long ago, IIRC in 2006... If you wanted the invoice to lead to cashflow quickly, you asked the customer to pay to an account that would speed up payment.
And legal; it's not like they're hiding their assets. It's a workaround from what IMO is a stupid move from the ECB. The low interest rates are another driver behind the housing prices going up and people risking more money in investments like stonks and crypto.
Multiple accounts on German invoices do not necessarily result from "tricks" to avoid negative interest.
Sometimes they result from a time where it took several bank working days to process a money transfer between different banks. Having bank accounts at banks with large customer bases (e.g. Sparkasse, Postbank, ..) allowed for quicker money transfers from these customer to the company. A customer could choose any of these bank accounts to settle the invoice.
Of course, a company could and can also have bank accounts not disclosed on an invoice.
Edit: Also note, that negative interest especially for major "online" banks just became a thing in Europe recently. Therefore, I think it is not only Entrepreneurs who redistribute their assets to avoid negative interest eating up their savings in addition to inflation, but also normal people.
Bitcoin.de is not an exchange but it offers a service equivalent to an exchange if you sign up at the fidor bank. Since everyone using that feature of Bitcoin.de has a fidor bank the transfers are instant.
Having a hard time calling this "exploiting" in a country where having different accounts with different banks is just something you do. Why would you have a single account with a single bank? Unless your account costs you loads of money instead of the banks going "thanks for your money, it's ours to invest how we see fit and profit off of, even if in theory you could withdraw it at any time. Which you won't". The dutch banking system is literally a foreign concept to North America. Imagine free accounts, free transfers to and from other banks, free ATM use, and not needing a credit card because banks actually did all the things that credit card companies put "on top of bank accounts" in the US. It's such a completely different system that analyzing the NL banking model with a pair of US glasses on just makes no sense at all.
Negative interest is an abomination considering how wealth enables further gain of capital. This is why cash should stay, otherwise people would be subjected to a lot of money grabbing. Entrepreneurs are acting correctly here.
Negative interest is a return to the origins of banking. You would pay a bank to hold your assets. What you got in return was the convenience of not worrying of getting robbed, or being able to transfer large sums across large distances with bank notes. imho - that was the proper way to think about savings. If bank patrons want to see interest on their savings, they should convert theirs to capital and actually invest it, with all the responsibilities and risks that entails.
It's completely applicable if the returns the bank can make are less than the operational costs associated with storing your money. The offered interest rate is going to be some function of the bank's operational cost subtracted from the bank's investment return.
When interest rates set by fiscal policy are so low that the bank can't make enough through investing deposits to offset the operational costs, negative interest rates must occur.
We don't chisel bank balances on stone/clay tablets anymore, or guard it with spears. Securing and transferring money should be much cheaper than it used to be millennia ago.
Today banks don't store anyone's money, they store a virtual database, ideally replicated a few times. For a bank, storing a trillion isn't any different than storing a million. There's a tiny per-account expense because it's a, well, a separate entry in the database.
Bank fee income will definitely go up as they are typically set at flat level and not linked to the deposit amount. Could it be that increased fee payments effectively undo the strategy of avoiding the negative rate?
Remember, you can beat the system, but you can't beat the house...
How does the housing market work in countries with negative interest rates, I am assuming the home loan rates are very very low so does that lead to a boom in house prices?
The housing market in the Netherlands is a complete train-wreck for almost a decade. The climate crisis pressing down on the ability to build new houses, the negative interests rate and a flailing government makes matter consistently worse. In Q1 2021 the prices rose with almost 12% compared to previous year, and the prices are rising almost quicker and quicker by each month, with no clear end in sight.
Yes, the loan rates are on a historical low, but have been already for a few years now.
Trying to move back to the Netherlands, but I despair of ever trying to buy a house there. Half a million is not uncommon for the area I’m looking :/ and that’s in a tiny suburb half an hour from Amsterdam.
Like, salaries do not seem to have similarly risen, so who the hell is buying these houses?
Salaries don't need to raise when interest rates drop. For same payment with lower interest rates you can service much higher principal.
For example at 1000€ month 5% rate you could loan 151 525€ but with 1% rate you could loan 217 441€...
How common fixed rates are? In Finland they are mostly 12 month Euribor(currently at -0.501%). Ofc you can buy "rate cap" type of service, but even those are limited length...
I think I'm confused. I have zero experience with Germany, so please be graceful with what may be a stupid question.
So you're saying the super low rate is only for a set period of time, and will change at some point in the future, correct? If the rate is set to change at some point, you can't really call it a fixed rate, can you? I thought fixed rate meant that it was just that rate for the life of the loan. Hence, fixed versus variable.
I presume fixed rate on real estate loans. You take 25 year mortgage, while having first 10 years fixed because its so cheap. You as a buyer hope desperately super low interest rates will still remain after those 10 years. If not, many people will be royally screwed since their monthly payments can easily double/triple.
Ie in Switzerland with their specific mortgages, it can easily go from USD 800 to USD 8000 per month if things go south, with drop in prices matching this development.
You generally have the option of setting the fixed rate for a lesser period of time in exchange for a discount. At least that’s how it worked in Japan.
Here is Australia mortgages are typically for 30 years but it would be unusual to fix your mortgage for more than 5 years. Once you reach the end of your first fixed period you can re-fix at whatever the market rates are at the time.
The American system where you have a fixed rate for the entire length of the loan is an oddity worldwide, and largely created by post-WW2 housing policy. In most other countries all mortgages are variations on what we'd call ARMs in the U.S: you get a fixed rate for a certain term and then it resets periodically afterwards.
> If the rate is set to change at some point, you can't really call it a fixed rate, can you? Hence, fixed versus variable.
Fixed rate mortage has fixed percentage for an agreed period of time (fixation duration). Variable rate mortgage is based on current inter-bank market rate (or some other index), e.g. EURIBOR + X %.
100 thousand euros? The limit in denmark is 13442 euros.....
"What we do is simply share the bill with our customers", but funny how they don't really seem to want to share the surplus...
I find this weird. How can you possibly have negative interest on a savings account? That means it’s quite literally better to withdraw all of your excess cash and stuff it in an old sock…
I wasn't saying that's what's happening here, the OP just asked how banks "could possibly" charge negative interest on savings. In a world where a bank couldn't use the money you deposited, they would have to charge you in some way. Negative interest rates could be one way to do it. Simple answer to a simple question.
Why should guarding your money be free? The concept of negative interest is very natural.
Banks have found ways to reinvest your deposits. If the earnings there are higher than the storage costs they can share some of the earnings with you. But if they can’t, they have to charge for their service.
Are they loaning it out at non trivial rates? Outside things like credit card debt I have understood that part of the problem is that rates are or are becoming trivial.
Yes, if you ignore the possibility of losing access to your funds, the possibility of getting hacked, the massive environmental impact, the inability to use it to pay for most legal things, and a couple of other things - crypto makes a lot of sense!
Chuckle, do you either work in a bank or government? Scared of losing job? Understandable. You have to be computer illiterate to not know how to keep your keys safe. We'll get there. While you are ok with funny money. Just a matter of time.
You have to keep cash on hand for emergencies. I can’t wait to cash out a mutual fund or stocks. Not to mention that I don’t want certain savings, such as a new car, to be at the mercy of the market.
A couple years ago I put a lot of my HSA into investments and the market tanked.
There's an important difference between simply storing funds with a bank, and using the convenience services that a bank provides when you are their customer.
BoA charges me for savings if keep under a certain amount. In the process of refinancing so I don’t want to hurt my credit and it’s the oldest account. Soon it will be closed. Most of my savings is in a credit union due to favorable interest rates.
If anyone charged me negative interests rates on the whole balance I would cancel my account.
Banks have given interest rates lower than inflation for as long as I can remember. If negative real interest rates are natural, then it is weird people are so alarmed by nominal interest rates being negative as well
The reason is (or so my bank claims) that the ECB charges negative interest, and all banks have large deposits there. They don't store the cash at home in a vault.
Banks don’t “guard your money” at all. They use it to make loans. Leaving money at a bank exposes you to vastly more systemic risk than just putting bills in a safe or something. If they’re not remunerating you for it, you’re getting screwed.
> Leaving money at a bank exposes you to vastly more systemic risk than just putting bills in a safe or something.
This is very dependent on the country you are in. Some countries have very conservative risk tolerances for their banks which are imposed on them and watched closely.
Before central banks there were local banks that operated like that, you could pay them to keep your money safe, or you could let them lend it out for a share of the interest, but you also had a share of the loss/risk.
With central banks the risks of loss is low enough that nobody needs the just keep my money safe service anymore - except now they do because rates are so low
Well, aren't you "loaning" the bank your money when you put it in an account? If everyone wanted to withdraw all the money from all their accounts at once the bank would be unable to pay; you get paid interest because you take on slight risk.
The bank is also providing a service (tracking your money, making it easy to manage and transfer) and that costs. We’ve just ended up in a situation where the cost of the service exceeds the value of the interest paid.
In the UK at least, I'd say we have ended up in a situation where banks found that their approach to 'selling financial services' vastly abused their customers and now they are having to pay massive sums in compensation, they need to fleece account holders in some other way to meet their income and profit targets.
Long-gone are the times when high street banks were based on loaning out the deposits from savings accounts. Building Societies do/did this, but of course the banks bought up most of those too in their spending sprees of M&A to become 'bigger and better'. Well, bigger anyway
Bank notes are a liability of the central bank. When you withdraw your money the central bank can just buy the bonds off that bank. Of course a bank without bonds is basically dead but from the perspective of the person holding onto the bank note nothing changed assuming the zero lower bound is strictly followed by the central bank.
Most people don't own a savings account because it is profitable. They do it because it us a valuable service. It provides an easy way to store your money that is secured by 'this collapsing is an exustensial threat to the government'. It also provides access to the financial system.
I would be willing to pay a lot of money for such a service. Of course, given that I already need it, I might as well choose a cheap option. If that cheap option happens to have a negative cost, I'm not going to complain.
Because if you put it in a sock, you risk it getting stolen or lost in a fire. And it's more of a hassle to pay with it. So the negative interest rate might be worth the safety and convenience of your bank account.
As for the reason: it currently costs the bank money to have your money (ECB interest rate on overnight loans is negative), in addition to the costs of operating the bank itself.
I am in finance and literally struggled to wrap my mind around this last year, until a proper fixed income trader explained this to me and I'll explain it the same way.
Last year, oil futures prices turned negative. Which means "wait, I can take delivery of oil AND get cash for it too." So why didn't people do this? Because there's a cost of cary to oil - I need to pick it up in a train car at a specific place in the US and I need to store it somewhere, which is expensive. So while they were "paying you to take the oil" you couldn't really just jump on it and do it.
This is an analogous situation to what's going on with a negative interest rate. You're right, you're literally better off taking the money out into a pile of cash. And if you only have a few thousand bucks you could just do that (but then you need to drive to the bank, figure out how to store it, drive back when the rate goes back up, etc.) But if you have a few hundred thousand bucks - what are you gonna do? Cash it out in hundreds and keep it in your garage? At some point the logistics and theft risk of that adds up too.
Meaning, similarly to the oil example, while the raw numbers indicate one strategy, the practicality of carrying the asset on your own tends to outweigh the benefit. So yeah, someone may chose to incur negative interest if their only other option is to pile up cash in the house where they have to worry about it being stolen, burning in a fire, etc.
Note that this is an inverse of Gresham's Law and is behind the large increases in value of alternative stores of value (art, real estate, cryptocurrency, stocks).
Gresham's Law is that "bad money drives out good" - when you have two forms of currency circulating within the economy and one is inflating at a faster rate than the other, people will tend to spend the inflating currency and hoard the appreciating one. The inverse of that is that they will tend to hoard the appreciating currency and spend the inflating one, i.e. as a store of value, nobody with long time preferences is going to hold cash. Instead they pile into any asset with zero cost of carry and a liquid market, which was stocks from about 1980-2010 and now also includes art, cryptocurrency, real estate, NFTs, other securities, etc.
It occurs to me that this could play tricks on how we measure interest rates. Assuming no central bank interference, interest rates are set at the equilibrium between people who want to borrow cash and those who want to lend cash. But nobody serious about future returns wants to lend cash! They've exited the cash market entirely, and only touch it when they need to convert long-term holdings to short-term holdings. Instead, they trade amongst themselves in asset markets, which have appreciated far quicker than 3% CPIs and 2% nominal interest rates would suggest. It could be that the divorce between stock market returns (10-15% in recent years) vs. interest rates (2-3% in recent years) might indicate that all of the firms with high time preferences have exited the cash market, leaving behind only those firms who need cash now.
> Assuming no central bank interference, interest rates are set at the equilibrium between people who want to borrow cash and those who want to lend cash.
Nitpick: It's the equilibrium between people who want to have savings and those who want to have debt. When you have deflation no such mechanism exists which is why the central bank has to set the interest rate manually.
It's crazy how lack of transparency and secrecy can allow a minority to use scheme to evade laws.
I once met a woman for some short class on business plans on zoom, and she was actually taught how to create a holding and the whole loophole package to optimize taxes. I asked about the morality of such thing, and I was shocked to realize she did not seem to care at all.
The banality of evil allows some people to just get access to an easier life by not caring.
The behavior of the people with multiple bank accounts in the article is both legal and perfectly ethical. Are you saying we have an ethical responsibility to pay as high bank fees as possible?
> I was shocked to realize she did not seem to care at all.
I do not understand why you would personally care about profiting from tax fraud/optimization? I understand that it would be good to prevent this on a societal level, but no personally.
Maybe we should start with making companies like Apple, Amazon, Microsoft, ... pay some taxes before getting riled up about some individual using the same tax tricks.
This thing with bank accounts: Why wouldn't everyone do it? Why would I lose money that I paid tax on just because someone, somewhere decided that want to "encourage" spending?
"Optimize taxes" - What exactly would be wrong with wanting to reduce the taxes you pay?
Did you ever calculate how much you are paying % wise in taxes? If you add all taxes including VAT, fuel taxes, random taxes and such you'll be suprised at the % you get "the priviledge" to pay as an employee every year.
Banality of evil is about ordinary people performing profoundly evil acts, like participating in mass genocide. It has nothing to do with the banality of legally optimizing your interest rate by opening a few bank accounts.
This is going to probably not be received well given HN’s famously visceral hostility to crypto… But you can get 5%+ yields on Euro stablecoins in DeFi. And I’m not talking fly by night ponzi pools. This is like on battle tested bluechip protocols like Curve on Uniswap.
Is the risk zero? No. Should you put all your funds there? No. But parking a small segment to balance out the negative bank yields is pretty attractive from a risk reward standpoint. If you’re getting negative 0.5% at the bank, you can protect your capital from decaying by moving 10% or less of your cash savings into DeFi.
People will do that when there are more normal onramps to crypto.
Currently to get crypto on Coinbase or wherever, one needs to go through a crazy signup process where you deliver photos of documents that enables anyone who gets ahold of these photos to identify as you and use these to sign up as you on other places.
It is a catch 22. There should be a crypto way of doing KYC. Not signing up by delivering a photo of you passport, but by signing a message cryptographically.
> Currently to get crypto on Coinbase or wherever, one needs to go through a crazy signup process where you deliver photos of documents that enables anyone who gets ahold of these photos to identify as you and use these to sign up as you on other places.
Really? I'd like to see a civil suit where an institution says I owe them money and shows a picture of my ID as proof of contract.
There are ways of signing legally binding things online (DocuSign for example, which AFAIK was actually tested in a trial in EU), but they have more sophistication than that.
What I mean is this: If online companies require a copy of some document as identification, then this document you just copied and sent out to them can be used to identify as you when signing up with other companies.
The old brick and mortar way was better: When you walk into a bank to sign up for an account, the bank now cannot walk into another bank as you.
A new crypto way would be better as well: Instead of copying data for identification, sign a message cryptographically.
I understand what you mean. I'm talking about liability. Will they be able to make a revolut account? possibly (although if I remember correctly, they also had video identification, which makes it about as secure as a real bank, but let's pretend). But having an account as me and having me on hook for something are different things. Revolut doesn't allow borrowing. Most things that involve liability still have better security.
or use one of the many traditional finance options that offer ~5% yields with less risk than crypto (hard to quantify the risk of "crypto", but there's regulatory, technology and volatility risk even amongst stablecoins and DeFi).
(this isn't an anti-crypto post, just making the point that 5% yields are not unique to crypto and that the choice isn't crypto vs. banks)
If there is only one investment vehicle (other than the stock market) that offers considerably higher returns than everything else, then that vehicle carries pretty by definition a much higher risk than you seem think it does.
Strictly speaking, the returns only indicate a higher perception of risk, which may not necessarily translate to the same amount of actual risk.
As far as I can tell, the risks of depositing stablecoins in something like Uniswap or Compound are the following:
1) The stablecoin might not be redeemable 1:1 for fiat in the future. Personally, I think this risk is negligible for USDC and minimal with DAI.
2) The smart contract code might have bugs leading to loss or theft of the deposited tokens. I think this is minimal with Uniswap or Compound. It's significantly higher with some other providers (which do seem to offer higher rewards, but not enough for my taste).
3) High Ethereum gas fees could make it very costly to withdraw your funds in the future. So far, I have seen these fees spike as high as US$200-300, but only for a brief period of time. Usually they settle back to $20-50. This might be the highest risk but is still acceptable, to me, anyway.
Taken together, these risks are well worth getting ~5% instead of 0.1%, to me. YMMV, of course.
Not necessarily. While I agree it is riskier, I think there's an argument to be made that higher returns can also come from an arbitrage on information/regulatory hurdles/slow moving corporations.
Personally I refused to entertain the idea of a stablecoins and after all the stuff that's happened around stablecoins has only reinforced that decision. It seems like it's not a matter of if, but when it becomes clear that the stablecoin is not really backed by real money.
I'm a big believer in crypto, but I don't think stablecoins are it.
I don't think it's fair / accurate to paint all stablecoins with a broad brush like that. Tether? Yes, it's at a bare minimum sketchy. USDC and GUSD are both regularly audited, and backed by cash reserves.
Saying that they’re backed by cash reserves is misleading. Yes, they do hold some cash to back the value of the coin, but that’s less than half of the total backing.
CDs and treasuries and commercial paper are pretty solid stuff - but they definitely aren’t cash.
Is that because banks are allowed to print money as they wish?
I mean, what became of the business where entrepreneurs go to a bank and loan money to finance building new ventures? For that the bank needs money, right?
So I guess that they don't want money from customers anymore means they get it from elsewhere. Probably from the government in the form of permission to print money?
Banks never lend other people's money. They create it. When you give your money to a bank, they add it to their reserves and your bank balance becomes a liability to them. They hold that liability because they need reserves for inter-bank transactions. When a Bank makes a loan to you, they don't take money from reserves. They simply create a balance in your bank account with them marking how much they owe you. They just create the money there. Reserves come into play when you want to transfer those funds to another bank. But if two people have a bank account with the same bank, then the bank doesn't need reserves to do that transfer.
So no, banks don't lend other people's money. Not a single bank in the modern world lends other people's money.
Bank lending in fact CREATES deposits. All the money you have in your bank account came from either A) Government spending B) Someone took out a loan. Either public spending or private debt.
Yes, this is a risk banks need to manage. They typically do this by not having all the reserves tied to instant access accounts. So deposit accounts where the person cannot take everything out at once like savings and CDO.
> So no, banks don't lend other people's money. Not a single bank in the modern world lends other people's money.
That's easy then. In case of a bank run, just give everyone their money back. They never loaned their customers' money, so they should have 100% of it ready to go.
Banks should NEVER give a negative interest rate. They make money on loans, time-value-of-money and other sound economic principles. There is something very very wrong when banks give negative interest rates.
The things that are very wrong that are causing it, have come into existence. It started in EU country central bank lending to banks. Now end consumers are seeing that in their personal banking.
Imaging a world where the Dutch now have a "bank" that is over the internet in another country. Their money is stored in USD stable coin, or another countries stable coin. Citizens could flee there, in mass.
First, the country (Netherlands), would try to stop the on-ramps. But sooner or later, there will be other entrepreneurs who make easy ACHes/wires that re-route to a crypto account and buy-into crypto (like a USD stable coin).
Then the country in mass, could move their bank accounts out of the Netherlands. Then banks in the Netherlands could collapse... ....or be replaced by a healthy alternative (foreign USD Stable coin backed accounts).
Then the massive fundamental problems going on in macroeconomics that cause the negative interest rates will become visible. These problems remain hidden from the citizen-base because of how technical they are. It would require they be fixed, instead of draining money from citizens to put-their-finger-in-the-dike patching the problem.
that's the thing, banks don't make enough money with loans if the interest rate is that low for such a long time. It's nothing very very wrong if banks do that it's just an effect of keeping interest rates low.
I don't fully understand your dutch over the internet bank stablecoin comparison, but if you mean that people could flee into different currencies than this is not new at all, some years ago this happened already with the swiss franc. It's also not hidden because there're well enough economists talking about the implications, it's not as complex as you think and yes people with money in the bank are going to be expropriated but this happens anyway if you print more money.
It's not entirely true that this is caused by the ECB. In fact, only 10% of a typical German bank account (Sichteinlagen) are required to be held with the ECB. For other countries it might be even less (minimal reserve is 1%). Out of these 10% the bank gets charged no interests on the first 6% (six times minimal reserve).
So if you have 100k€ in the bank in Germany, that bank has to pay for 4k€ - that's just 20€ per annum and charges you 250€ (assuming a typical 50k€ exemption). At the same time they can lebd out 90k€ at a market rate of 1.5% to finance some housing. That's 1350€ revenue per annum. So in this simplified, idealized case, the bank just asks you to increase their revenue by 17% out of your own pocket.
The only case when the bank has to pay more is when they don't hand out enough credits and whose fault is that, frankly? Who should carry that risk?
Yeah right. Because banksters would never all run the same scheme, right? They are so "competitive", you would never find the same conditions on every bank account nation-wide.
Indeed, in addition the central banks don't just charge negative rates, they also allow borrowing at negative rates (-1%) via the TLTRO which means banks are making money borrowing from the ECB, they currently receive more money from TLTRO loans alone than the ECB charges them.
In short, low interest rates are obviously a factor, but banks didn't have to do this. They're charging you because they can and because most banks are following suit.
Does anyone _not_ have multiple bank accounts? It makes sense, not just because of negative interest rates, but for when things like a bank's IT systems going down.
At least in the UK, you're typically not charged for having a basic bank account; fancier ones do have monthly charges.
"Negative interest rate" is such an Orwellian term. Let's just call it what it is, the government penalizing you for not spending your own money as fast as they think you ought to.
Banks don't just sit on piles of cash, they lend it out. That's literally what banks do with the money people deposit in them, it's the whole point of banks!
I'd argue that the main point of banks is that they protect your money from theft. Given that most people who use banks are poor and don't actually receive any significant interest.
They don't receive significant interest because banks choose not to share any interest with the end customer. Easy access savings rates have been sub-1% for so long in the UK that customers have instead turned to exploiting introductory offers on current accounts.
EDIT: This whole comment is pretty pointless in context. I didn’t read the the thread closely enough. It’s the sort of argument at cross-purposes that makes us all hate internet comments. I’ve left the text in place so readers can see what other people were responding to, but, y’know, I think it’s pretty dumb.
This verges on pedantry in this context. Banks are required to have a certain amount of capital in reserve to make loans (the reserve requirements and capital adequacy ratios set by central banks). Deposits from consumers give the banks the reserve capital they need to make those loans.
Without a way to use the deposits to make money the banks would just as soon not have your money.
> Banks are required to have a certain amount of capital in reserve to make loans
Not if these loans are secured then they can make as much money as they want from thin air.
> Deposits from consumers give the banks the reserve capital they need to make those loans.
No. At least in the US, they just need to secure the loan with an asset that can be held from the dealers. Most of the time, if you got your mortgage from a bank, they'll just liquidate for real cash.
> Without a way to use the deposits to make money the banks would just as soon not have your money.
Which is why, in this new system, banks have become hostile to customers. Banks are no longer in the business of helping customers but trading money market funds.
Banks grant credit (bank money) when debtors promise to work.
Your money is effectively a share in the bonds that banks hold onto. In other words, the point of banks is not for people to store their money and earn interest, it's to provide liquidity and a trusted intermediary. When the bank pays interest it basically tells you to keep your money to make room for the investment spending. You and a company want to buy a car, you say the company should go first and you wait until the next car is produced.
In theory you could do the same thing without the bank by writing an IOU saying you work x hours and then use that as money. The problem is that people have to trust you and the IOU is not fungible (it may be worth $4k when all you want to buy is $50 worth of groceries).
Not OP, but I'd say, sure why not. Why does it have to be productive? It's arguably yet another paternalistic government intervention in the form of tweaking and twiddling with economic and regulatory knobs.
This is exactly the opposite of paternalistic government intervention. If the money can’t be put to productive use then the bank can’t profit from holding your money and they’d just as soon not have it. If you insist on giving it to them anyways they charge you for the privilege.
Right, I have zero shame about doing this to avoid the truly insane limits (it's like $15,000) before negative interest kicks in per account in Denmark.
Seems like a strange way to implement a wealth tax since it only applies to a single type of wealth (cash) and not equity, real estate, commodities, etc.
What are you referring to? If anything I know the Netherlands as having a comparatively few forms of wealth tax compared to other countries, the main wealth tax is mostly based on 'one form' that is completely undifferentiated (i.e., any net wealth, as part of box 3)
That's the point though: large amounts of cash should not be sitting there, they should be circulating through investment. It's not a tax as much as an incentive. Inflation functions the same way by making holding on to cash a losing proposition.
There is just SO MUCH cash right now in the hands of the wealthy classes and it's just sitting there in bank accounts not being circulated.
Low interest rates rather increase wealth than decrease it. Except for cash, almost all other assets increase with low interests such as stocks, real estate etc. So the wealthy generally get more with low interest rates and not the other way around. Probably also one of the reasons why it is so difficult for central banks and politicians to decide to increase the interest rates although it's most likely badly needed.
It’s not a tax (the governments are not getting any money from this). If it were, it would be terrible, because outrageous wealth is not in cash on bank accounts. It’s in things like real estate or stocks, which don’t lose any value because of negative interest rates.
> If it were, it would be terrible, because outrageous wealth is not in cash on bank accounts.
The only outrageous wealth you listed was real estate because of the land component. Nobody gets hurt by stocks. People get hurt if money ceases to circulate because money is needed to pay incomes, taxes and debts. If all the money piles up in one bank account everyone stops working. Meanwhile if one person owns all the stocks people can still work and be happy.
> Meanwhile if one person owns all the stocks people can still work and be happy.
I know you didn't mean it quite so literally, but this paints a rather dystopian picture: a single person holding effectively all the material wealth while everyone else happily shows up every day to work for them
You can have an outrageous amount of something that is not intrinsically bad. Money, or wealth in general, is not a bad thing in itself, but its distribution can be outrageous.
This applies to regular people in Spain. Banks have started to pass these costs to the customer and practically all kinds of accounts that have traditionally been free now cost money to keep, even if you only make minimum wage. Needless to say, I'm not happy with the ways the EU screws over poor people.
I didn't say they don't exist anywhere else, but they didn't exist here until recently.
I also didn't say the purpose is screwing poor people, but like many other things like car emissions caps, they introduce new regulations and laws and bullshit without thinking the poor are often disproportionately affected by them.
It's not a question of a tax on the rich vs. a tax on the poor, it's a tax on savers to benefit borrowers and spenders. You're forcing the responsible to subsidize the irresponsible. Donald Trump loves low interest rates for example, because he uses debt for everything. My grandmother by contrast, would always be sure to have a rainy day fund with plenty of cash. Having lived through the Great Depression, she knew it was prudent to always keep some cash on hand and not have everything tied up in illiquid assets.
Sadly the world no longer values savings and prudence. Might as well jump out on the risk curve and get rewarded with everyone else. Those with the worst loans in '08 were bailed out so there is little downside. I wish it were not this way but might as well take advantage
Formally, it’s the central bank penalizing you as it is independent from your federal government. Of course, the federal government (being it the US or a EUR member state) loves low interest rates for deficit spending.
The government isn’t penalizing you for not spending money. The bank is providing services (safeguarding and transferring money, primarily) and that costs money. The difference is that for the first time in a long time they can’t make enough from deposits to cover that cost.
It's not like they have physical cash to guard these days. Most of these accounts and money is "just digits in a mainframe somewhere". Kind of similar to what happened with traditional vs ebook publishing - there are still some costs, but no longer shifting physical things from place too place should save the customer some costs.
That doesn't make maintaining it free, just cheaper. There's a lot of money out there looking for investments, driving up prices and hence driving down returns.
> The difference is that for the first time in a long time they can’t make enough from deposits to cover that cost.
Yes, and the reason they can't make enough is because central banks are pushing down interest rates in order to nudge people into spending vs. saving. If central banks were not acting as a lender of last resort (at record low interest rates no less), the cost to borrow would be higher, and savers would likely be seeing higher interest rates.
That isn’t penalizing savers; that just isn’t actively subsidizing them (and by extension the rest of the investing world, since that would easily be the most attractive place to have your money in the world).
Also, central banks have a mandate to be the lender of last resort. It’s one of their most fundamental duties and they’ve been doing it for as long as they’ve existed.
The government will also penalize you for not using those services however. For instance, in many places it's impossible to purchase real estate with cash.
> And neither is the federal reserve in the US. The Federal Reserve is allegedly independent from the government.
No, its not.
The Fed Board of Governors (like other independent federal agencies) is independent within the government; which is a term of art for executive-branch agencies with leadership board/council/commission that have terms (both length and staggering, usually) and partisan composition rules which prevent them from being reshaped over a short term to reflect the partisan interest of the current President and/or Senate majority, even when those are aligned.
Because its powers are assigned by Congress under law and freely changeable by Congress through new law, it is not and cannot be independent of government (even of by “government” you mean only the President and Congress.)
It is quite independent. They are in a tug of war with the commission and the council of ministers by design, so their autonomy fluctuates with time, but the commissioners (and several member-states) are regularly quite unhappy with the ECB. The ECB typically does not care about politics and looks only after economical indices. They are known to be afraid of the tiniest bit of inflation, which resulted in counter-productive policies at time.
I am not familiar enough with the federal reserve to say how similar they are.
He probably meant, for a certain demographics the inflation is higher since they they have a different consumption "basket" than the average citizen.
E.g. young people are more likely to rent than owning an appartement. But the general inflation reflects only the average spending on housing. So if 50% of the population owns a home, rising rents are only reflected half as strong for the general population.
However I could not find any reliable numbers how strong the contrast for each demographic group is...
Germany reduced its VAT last year in july by 3% and reinstated it this year. This masks inflation quite a bit. Inflation last august was 0% (rest of the year was negative). So inflation compared to 2019 is also 4% for august.
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[ 1.6 ms ] story [ 323 ms ] threadThe article also fails to mention that bank deposits are only gauranteed up to 100k as well, so if you have a bunch of cash sitting around it is wise to spread it around different institutions anyway.
Current best instant access rate is around 0.65%.
I’ve never quite understood -- can’t the bank do that for you?
If the obstacle is that savings accounts are expected to have a guaranteed rate with zero risk, the banks ought to provide very easy access to investment accounts, with the ability to move money around frictionlessly.
Is there just no demand for that kind of service, or regulatory problems, or something of that kind?
Edit to add: I always felt that offset mortgages (https://en.wikipedia.org/wiki/Flexible_mortgage#Offset_mortg...) were a nice solution to this problem; it gives you a place to stash your savings and get a reasonable rate of return (basically matching your mortgage rate) while still being accessible if needed. But they seem to have gone out of fashion again, at least in the UK. Anyone know if there was some problem or disadvantage (either to consumers or to the banks)?
You want them to tell you you have a fixed, gauranteed rate of return and use it to buy some apple stock or some bitcoin with it?
The answer is they can do it for you, they do, do it for you, but you have to sign up for the gambling account not the instant access cash savings account.
I guess there ought to be some safeguards, e.g. at least XX% of your money in a safe place. But there’s a point at which safeguards become friction that just stop you investing at all.
For example, in the UK you have ISA accounts, which should work like that, but the restrictions are so annoying (yearly cap on deposits) and the benefits so weak (tax exempt, but on a pitiful interest rate so it makes no difference for most people) that they’re not very useful. Unless I’m missing something.
Your investment options are limited to actual investments basically, so essensially shares. Term deposits dont seem to be a big thing in the UK for whatever reason, and we dont have the US tax breaks to buy municipal bonds etc.
ISA's are great, you can go buy some apple stock or some FTSE funds or depending on the provider one of 1000's of funds with it. 'Cash ISAs' while rare are still around are no better or worse than a savings account (IMO).
This is a good nudge for me to look around for better/easier options to store petty cash in, so I’m going to do that. Thanks!
What's the CFO going to do when Eurobonds are negative too ?
Converting it un-necessarily into another currency introduces exposure to forex risk.
"Investing", aside from the risk, is not cash or cash-equivalent, so that's out of the question.
Hence the best answer is generally just splitting out into multiple Euro bank accounts.
Government bonds? Corporate bonds? Stocks? Crypto?
Are you willing to cover their potential losses with government guarantees?
Savings accounts are supposed to be a safe storage of money. They have certain insurance guarantees because of that. Encouraging banks to use that money to speculate is exactly what you don’t want them to do. Savings banks are not known to employ the most brilliant investment minds.
https://en.m.wikipedia.org/wiki/DSB_Bank
I would assume since the 100k are guaranteed by law that the state does not further step in on losses above that.
When there is no law like that in place the situation is entirely different.
FDIC deposit insurance, 250k per FDIC-insured bank, per ownership category.
Are the two that come to mind. Cyprus deposits in a couple of banks in 2013 above 100k were lost I believe. Icesave played out badly in the UK in 08, quite a few councils etc took some nasty lossses.
Either way, waiting for multiple years, winding up and down of court cases, bankrupcy proceedings etc to find out if the rest of your money is gone or not is not much fun.
The kind of person parking a couple of 100k in cash accounts is almost by definition risk averse.
If you have decent money, using single account/country is not just lazy, but stupid.
Below the list of the world's top 50 safest banks
https://d2tyltutevw8th.cloudfront.net/media/document/press-r...
Iceland bank issues were widely covered too
https://www.dnb.nl/betrouwbare-financiele-sector/nederlandse...
The germans made this official in the 2007 crisis by declaring that all bank accounts are guaranteed by state, with a 1 billion euro limit.
My bank account's got robbed by European Commission. Over 700k is lost.
The most of circulating assets on our business Current Account are blocked. Over 700k of expropriated money will be used to repay country's debt. Probably we will get back about 20% of this amount in 6-7 years.
I'm not Russian oligarch, but just European medium size IT business. Thousands of other companies around Cyprus have the same situation.
The business is definitely ruined, all Cypriot workers to be fired. We are moving to small Caribbean country where authorities have more respect to people's assets. Also we are thinking about using Bitcoin to pay wages and for payments between our partners.
Special thanks to:
- Jeroen Dijsselbloem - Angela Merkel - Manuel Barroso - the rest of officials of "European Comission"
P.S. The worst thing is, that even a month ago I was suspecting that things can go wrong. In February, I several times called my banker and lawyer and asked them if money on the account is safe, mentioning that article in Financial Times. But they convinced me that there is no reason to worry, and even if country goes default, in no way current accounts may be affected. "This is European Union and banks here can't just grab your money and go" I was told. I got a hard lesson and now I know the meaning of phrase "TRUST NO ONE".
(...)
The stealing of my money is now finalized.
Yesterday I looked at my Laiki account and found that frozen amount is not more shown on my balance. 100% of frozen funds is now appears as outgoing transaction to nobody with comment "DECREE".
Also there are some news from lawyers.
Quote The Supreme Court has not announced its decision yet. It examines preliminary objections raised by the Attorney on a basis that the Law and the Order are political acts of the state (like decision to start war) and therefore cannot be examined or controlled by the Supreme Court and that the matter in issue should be considered as a private and not a public law matter.
Also, there is recent translation of the "Capital Controls imposing DECREE"
[ 2013-07-10 10:49:23 PM Update ] "Blocked Funds" amount has finally disappeared from our Laiki account. Bank told me it's "waived" (their interpretation of word "stolen"). We won't receive any bank shares as compensation for confiscated amount since the bank is liquidated. The rest of the money (100k EUR) are still subject to Capital Control and we can only transfer 5K monthly.
Today I had a conversation with a manager from Laiki Bank. He has been honest and confirmed that we may forget about anything over 100K as it's already spent to pay country's debts. Also, I was warned that the financial situation in the country is getting worse and worse and we should be ready to lose even part of insured (under 100K) money during this year (this is why they keep capital control enforced).
By the way, this style of "bank restructuring" is going to be adopted in the whole European Union. Soon, everyone's uninsured money (over 100K EUR) in EU banks will be at risk of seizure.
Is this from around 2013, or more recent?
https://www.investopedia.com/terms/b/bailin.asp
Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes[11] requires all member states to have a deposit guarantee scheme for at least 90% of the deposited amount, up to at least 20,000 euros per person. On October 7, 2008, the Ecofin meeting of EU's ministers of finance agreed to increase the minimum amount to 50,000. ...
Which is not EU-wide deposit insurance. It is a directive asking EU members to create national deposit insurance schemes.
Also in DK, the limit for being charged negative interest is generally 100,000 DKK ~ €13,500. With IT salaries it can become a monthly hassle dealing with it.
Probably why their Estonian branch was used to launder money.
https://en.m.wikipedia.org/wiki/Danske_Bank_money_laundering...
Most (all?) online banks I've seen will charge negative rates.
But ultimately the "if, how and when" is a commercial decision for the bank.
Some of them set higher cut-off levels (e.g. 50k vs 100k vs 1m).
Some of them segregate by account type (e.g. higher cut-off for retail clients than for business customers).
It might well be that some of them have a "fair-use policy" where they silently "eat" the negative rates but will quietly invite you to pay or move elsewhere if you have a large balance.
NSA-OS 14:88 09/01/2021 - Comment flagged for manual check
Negative rates have been around since 2014. And this "trick" of opening multiple bank accounts has been exploited across the EU for pretty much the same period of time.
For example, I've frequently done business with German companies. They don't even hide it. It is not in the slightest bit uncommon to receive an invoice with four or five EUR bank accounts printed on it. You can randomly pick your "preferred" account to pay to and the company's accountant will rebalance the accounts at the end of the quarter (or wahtever).
Also, it's usually a good idea to have a backup just in case something goes wrong with your primary bank account. Dealing with bureaucracy is bad enough, dealing with it while you're also unable to send or receive payments is way worse.
Isn't Germany subject to SEPA time constraints like everyone else ?
> ...[A]ll standard SEPA transfers should arrive within a maximum of 2 working days. Keep in mind that if a transfer is made just before a weekend or holiday, the time frame will be extended to a maximum of 3 working days.
> You’ve probably heard that all SEPA transfers have to be completed within one “banking day,” so let’s clarify what that means—one banking day is equivalent to two working days due to the opening hours of the banks involved. Any weekday that is not a holiday is considered a working day.
[1] https://support.n26.com/en-eu/payments-transfers-and-withdra...
Why ask the customer to pick? Why not generate invoices with a randomly picked bank account (which can also lend itself to automatic rebalancing)?
Maybe its just my perspective having (mostly) dealt with SME's. I would guess larger companies are more clever about it (e.g. perhaps they have one "receipt" account and then the money gets automatically spread out from there once received).
You could load-balance once per-customer and not trip this, but that doesn’t get you fully automatic rebalancing.
They could have it randomize per vendor I suppose but all that is a lot of hassle when you can just put five accounts in the Payment Advice field in your accounting software and let the vendors do with it as they choose.
Would be interesting to learn if they give the list in the same order always or if they randomize the order of the account numbers listed, DNS round robin style :)
The simple answer to this is because "Payment Advice" is a big text field in your accounting software and "Randomize per invoice" or "Randomize per vendor" isn't an option it has.
Fees are usually lowest and the transfer is fastest if source and destination accounts are at the same bank.
Slovenia has 5 or so popular banks. Thus it’s feasable for a company to cover banks of most payees.
So it's worth knowing which "banks" are really just different different brands of the same parent institution, if you're trying to diversify because of this limit.
https://www.fscs.org.uk/what-we-cover/banks-building-societi...
_If you have money in multiple accounts with banks that are part of the same banking group (and share a banking licence) we have to treat them as one bank. This means that our compensation limit applies to the total amount you hold across all these accounts, not to each separate account._
To take an extreme example, imagine running Apple’s reserves. It’s probably close in scale to the finances of a fairly large country (and considerably more profitable).
Czech Republic GDP (2021) $276 billion
That means Apple, one entity, receives (not including spending) as much money as every single transaction that occurred in the entire country of the Czech Republic in a given year. Any people say Apple is overvalued...
Not that individual depositors get a say, but isn't this (the consolidation of banks to relatively few players) the larger source of risk?
In the US, my understanding is that there are a lot of small local banks, but that they are all dependent clients on a much smaller number of larger banks. If I go to my local credit union, I don't think I have a straight-forward way of knowing which mega-bank they depend on, if any. If "per-bank" limits are meant to spread out risk, isn't this undermined by consolidation? Or do I misunderstand the structure of mutual dependence between banks?
That's because branch banking used to be banned.
Predictably, the US also had a history of bank instability.
Canada, by comparison, has enjoyed stable banks with many branches diversified over the whole country for centuries.
I'd ask for sources if you want to make claims that broad.
Well, 'centuries' interpreted as an integer multiply of 100s of years was probably overstating things a bit.
See also https://www.alt-m.org/2015/07/29/there-was-no-place-like-can...
Of course, this is not limited to big businesses. You can do the same with an IB brokerage account but I guess the added complexity is what puts people off.
Wealthy people opening multiple accounts to stay under the FDIC limit is just an example of folks finding a loophole to receive a government benefit that was never really intended for them in the first place.
For instance, I keep $XX,000 in my bank account but a negative $XXX,000 balance in my brokerage account.
And I'm not particularly wealthy.
This way I have an isolated cash cushion buffer separate from my investments, and I don't really care what, if anything, that money makes. It's actually invested in my brokerage account, at a [edit](1.25%) margin APR, that's tax deductible - and offsets my capital gains.
[edit] correction: I double-checked, I guess I'm paying closer to 1.25%. Looks like margin rates are both up at IBKR, and my recollection was off. Thanks for the spot-check throwaway2037. It's hard to find the historical rates, too.
If you want to keep the banking system stable, it's good to keep some skin in the game for depositors.
There's always government bonds (and money market funds that invest in government bonds, and narrow banks that only invest in government bonds etc) for people who want as much of a guarantee as FDIC can give you.
Or more concrete: without something like FDIC banks have some incentive to arrange they balance sheet in such a way that it's (a) safe, and (b) simple and transparent enough to convince customers that it's safe. Customers have an incentive to look for banks that are simple and safe.
(Customers don't have to do the balance sheet analysis themselves. They can rely on third parties.)
With something like FDIC, customers don't care how risky their bank is. In fact, more risk is better if that ever so slightly raises the returns available.
(FDIC charges insurance premiums, but they are not properly risk adjusted.)
First, the stated reasons might not be the real reasons.
Second, the stated reasons might be the reasons as intended, but the people making the laws might still misunderstand what's actually happening.
See eg https://www.alt-m.org/2021/05/20/how-u-s-government-paper-cu... for some wider background.
And those places had very stable banking systems during that time. The Canadian experience is especially instructive when compared to its tightly (but fragmentedly) regulated neighbour in the south.
In any case, 'strict' but fixed regulations but shielding customers from consequences just leads to gaming of the regulations.
It's better to give customers (and other stakeholders) skin in the game, and reduce the regulation to perhaps a duty to disclose truthfully. Then customers can police their banks.
You get shit like Nikola, like Theranos - all that had sophisticated accredited investors looking at the books, not just randos, and look how that turned out. Ones dead and the other is pushing cars down hills in PR stunts worth billions in market cap.
The directionality around regulation is clear: without it, rivers caught fire. Then we got environmental regulations and lo and behold, no river fire. The idea that customers can just police the environment is equally baseless. Customers aren’t experts in finance or the environment. That’s why we delegate the work to a group of experts who are.
Banks are too important to yolo. Retailers can get their risk on elsewhere.
See https://www.alt-m.org/2015/07/29/there-was-no-place-like-can...
Do you not agree that the average individual is not an expert in what makes for a successful banking system? If that's the case why would you leave it up to them?
I agree I overstepped when I said it "never" works - generously, I was being hyperbolic, however cherry picking a few good outcomes doesn't a blueprint make, IMO.
> In this book, Robert Anderson, a development consultant and former World Bank economist, recommends a different approach. Instead of adopting policies that are common in rich countries, Anderson suggests that policymakers take into account the institutional weaknesses typical of developing countries - corruption, deficient rule of law, cronyism, and so on. Simpler, market-oriented policies are more suitable to poor countries institutional environments and more likely to produce growth and keep the private and public sectors honest.Anderson recommends sometimes counterintuitive policy solutions for a number of areas - banking, privatization, corporate governance, bankruptcy, and competition. For instance, he argues that "rich countries were once poor countries" and that "examples from the past in rich countries may be more appropriate for poor countries today."
I chatted with the author a bit. Many of his suggestions are useful for rich countries as well.
The argument starts from the observation that honest and competent civil servants are one of the most precious commodities a country can posses. They are in limited supply, and should be used wisely and sparingly.
To give an example from child rearing: instead of the parents always intervening for how to share, teach your kids the divide-and-choose rule. https://en.wikipedia.org/wiki/Divide_and_choose
Similarly, in the US there are essentially two kinds of bankruptcies: chapter 7 and chapter 11.
Simplified, in chapter 7 the business just gets auctioned off, and proceeds go to the creditors.
In chapter 11, the business keeps running mostly under old management, but with lots of micromanaging from a court.
The former is rather simple. The latter has lots of opportunities for incompetence and corruption.
The author suggests not implementing something like chapter 11.
> Do you not agree that the average individual is not an expert in what makes for a successful banking system? If that's the case why would you leave it up to them?
The average individual is not an expert in making shoes. But we allow everyone to manufacture shoes.
Customers are by and large wise enough to buy shoes from competent producers.
Historically, for banking it turns out that regulating them like shoe factories works really well. Adding special regulations just leads to lots of gaming of the system, and to regulatory capture and suppression of competition etc.
From a game theoretic point of view, governments also have a hard time committing themselves. Eg committing themselves to paying back their debts or not issuing too much of a currency even in emergencies.
That's because governments are, in a sense, too powerful.
A normal company can bind itself with contracts, and they will be enforced in court.
A government can try to do the same, but they can always pass a law that makes the old contracts void.
(Rant over for now. It's becoming a bit rambly.)
Of course, even if the FDIC doesn't charge enough, you'd still have meetings about how to game the system so that your bank pays less. It's still a cost to the business.
In 1934 (the year after the FDIC was created) the FSLIC was created[1] (Federal Savings and Loan Insurance Corporation). It served the same purpose as the FDIC, but for financial institutions incorporated as Savings and Loans rather than Banks.
By 1980, the FSLIC insured approximately 4,000 savings and loan institutions with total assets of $604 billion.[2] They failed en-mass. By 1982 the net worth of the entire S&L industry was approximately 0.[2] Yet we did not have a major "run on the banks" like we had seen during the Great Depression.[3] Under federal control, the FSLIC closed or converted essentially all remaining S&Ls and that industry ceased to exist -- but WITHOUT individual citizens losing all their savings.
This was the very reason that the FDIC was created in the first place. A complete collapse has already happened once (albeit with the FSLIC, not the FDIC). FDIC regulation affects the kinds of risks that banks take even today. In fact, most every year, there are a few banks the FDIC is forced to take control of and liquidate (their ultimate power).[4]
The FDIC is VERY much a useful institution. We have chosen to expect major investors and regulators to assess the stability of banks, but to insulate individual consumers from doing so by removing their "skin in the game" and personally I believe that is the right decision as those individual investors don't have and could not obtain the information they would need to make wise choices.
[1] https://www.investopedia.com/terms/f/federal-savings-and-loa...
[2] https://www.fdic.gov/bank/historical/history/167_188.pdf
[3] https://www.history.com/topics/great-depression/bank-run
[4] https://www.fdic.gov/resources/resolutions/bank-failures/fai...
The Savings and Loan crisis also didn't happen in a vacuum. See https://www.econlib.org/library/Enc/SavingsandLoanCrisis.htm... for some background. A short excerpt from the start:
> Federal deposit insurance, which was extended to S&Ls in 1934, was the root cause of the S&L crisis. Deposit insurance was actuarially unsound from its inception, primarily because all S&Ls were charged the same Insurance premium rate regardless of how safe or risky they were. That is, deposit insurance provided by the federal government tolerated the unsound financial structure of S&Ls for decades. No sound insurance program would have done that. Congress tried to rectify this problem in 1991 when it directed the FDIC to begin charging risk-sensitive deposit-insurance premiums. However, because those who should pay the most would scream the loudest to Congress, the FDIC’s premium structure still does not charge the riskiest banks and S&Ls enough. Much of the time, the “drunk drivers” of the S&L and banking world pay no more for their deposit insurance than do their sober siblings. Those who do pay more still do not pay enough.
The article goes on to talk about regulation Q and other regulatory choices that contributed to the crises.
But when you say this:
> customers would have had an incentive to push back against the banking behaviours that led to these mass failures
I'm not persuaded. Do you think that customers would have gotten savings and loan corporate officers to provide them with detailed documentation of the S&L's risk portfolio and then would have analyzed this in detail and chosen where to save their money based on the results? Because I don't believe ANY customers could have done that. As you point out, regulators didn't even do that, and they are experts whose full-time job is to do this kind of analysis!
I can dig up how that worked in practice in the free banking eras in Scotland and Canada.
> As you point out, regulators didn't even do that, and they are experts whose full-time job is to do this kind of analysis!
In general the regulatory regime for banking is a bit weird in this respect:
The government tends to give minimum quality standards for the balance sheets of eg banks, and then hands out an implicit (or explicit) guarantee that anything meeting these minimum standards is fine.
In the regime I am suggesting the government would at most force banks to truthfully disclose what's on their balance sheet, but would not put up any minimum requirements.
What happened in practice in Scotland and Canada is that banks would have very low reserves, for every 100 dollars in deposits and notes issued, they would keep around 2 dollars in gold around. (The equivalent today would be central bank reserves.) Basically, just enough to meet redemption demands in the short term.
But to make up for that, they would keep very thick loss-absorbing equity cushions. Typically about one third of their balance sheet were financed by shareholder equity, and the other two thirds with deposits and bonds etc.
Banks also put these equity cushions in their advertisements to prospective customers. So it seems they believed that customers cared about them.
In some instances, shareholders and directors were also personally liable for losses beyond their paid-in capital. (Ie no limited liability shield for them.)
Interesting enough, the latter is also how eg Goldman Sachs used to be run when it was still a partnership and not a public company.
If you want to know more, have a look at eg http://files.libertyfund.org/files/2307/Selgin_1544_Bk.pdf
(https://www.iea.org.uk/sites/default/files/publications/file... is also quite interesting, but on a slightly different topic.)
Minimal comfortable retirement at 65 requires is what, ~ 1M USD in assets? What the FDIC rule implies, is you can't do this in cash. So obviously, inflation makes it stupid to do that in cash, but even without inflation this FDIC rule basically forces you into playing the wall street game (aka subsidizing rich people) in order to retire comfortably. Think about that!
Of course, in our economy inflation is real, too, so pretty soon they are going to have to increase this to beyond $250k even.
ETA: 2011
Sometimes they result from a time where it took several bank working days to process a money transfer between different banks. Having bank accounts at banks with large customer bases (e.g. Sparkasse, Postbank, ..) allowed for quicker money transfers from these customer to the company. A customer could choose any of these bank accounts to settle the invoice.
Of course, a company could and can also have bank accounts not disclosed on an invoice.
Edit: Also note, that negative interest especially for major "online" banks just became a thing in Europe recently. Therefore, I think it is not only Entrepreneurs who redistribute their assets to avoid negative interest eating up their savings in addition to inflation, but also normal people.
It could also mean that any amount you borrow would result in you paying back less. It would be a negative interest rate...
When interest rates set by fiscal policy are so low that the bank can't make enough through investing deposits to offset the operational costs, negative interest rates must occur.
Remember, you can beat the system, but you can't beat the house...
Yes, the loan rates are on a historical low, but have been already for a few years now.
Like, salaries do not seem to have similarly risen, so who the hell is buying these houses?
People and institutions looking for a way to 'park' their funds in a safe investment.
Interest on saving accounts is < 1%, loans are cheap, so everybody's trying to buy houses right now. House prices are rocketing up.
There will be lots of tears and people will lose their home once this starts to change and the fixed rates run out on some of those very cheap loans.
I think I'm confused. I have zero experience with Germany, so please be graceful with what may be a stupid question.
So you're saying the super low rate is only for a set period of time, and will change at some point in the future, correct? If the rate is set to change at some point, you can't really call it a fixed rate, can you? I thought fixed rate meant that it was just that rate for the life of the loan. Hence, fixed versus variable.
What am I missing?
The lower x is, the lower the interest you pay during those years.
For example, banks can offer the following loans: - 20 year fixed rate at 1.30% - 30 year fixed rate at 1.42%
So there is a possibility to gamble with the interest rates while still having a "fixed" rate.
Ie in Switzerland with their specific mortgages, it can easily go from USD 800 to USD 8000 per month if things go south, with drop in prices matching this development.
So
Floating rate: 0.7%
1 year fixed rate: 0.9%
5 year fixed rate: 1.2%
10 year fixed rate: 1.4%
35 year fixed rate: 1.6%
Fixed rate mortage has fixed percentage for an agreed period of time (fixation duration). Variable rate mortgage is based on current inter-bank market rate (or some other index), e.g. EURIBOR + X %.
If a bank is forbidden from investing your money, and thus putting your savings at risk, then it costs them money to safely manage it.
Banks have found ways to reinvest your deposits. If the earnings there are higher than the storage costs they can share some of the earnings with you. But if they can’t, they have to charge for their service.
And they are also loaning out your money to others at a non trivial rate of interest.
A couple years ago I put a lot of my HSA into investments and the market tanked.
New and used car prices are like a jump rope this year, regardless...can't hide from the market in cash.
I can’t have a down payment plunge because Yellen made an announcement or (as I saw last year) a roller coaster of an election year.
If anyone charged me negative interests rates on the whole balance I would cancel my account.
This is very dependent on the country you are in. Some countries have very conservative risk tolerances for their banks which are imposed on them and watched closely.
With central banks the risks of loss is low enough that nobody needs the just keep my money safe service anymore - except now they do because rates are so low
Long-gone are the times when high street banks were based on loaning out the deposits from savings accounts. Building Societies do/did this, but of course the banks bought up most of those too in their spending sprees of M&A to become 'bigger and better'. Well, bigger anyway
Lafarge met with other banksters in a castle, and they had a big fight.
Also, an interest rate of -0.5% is not that much worse than 0% -- they're both a few percentage points below inflation.
I would be willing to pay a lot of money for such a service. Of course, given that I already need it, I might as well choose a cheap option. If that cheap option happens to have a negative cost, I'm not going to complain.
As for the reason: it currently costs the bank money to have your money (ECB interest rate on overnight loans is negative), in addition to the costs of operating the bank itself.
Last year, oil futures prices turned negative. Which means "wait, I can take delivery of oil AND get cash for it too." So why didn't people do this? Because there's a cost of cary to oil - I need to pick it up in a train car at a specific place in the US and I need to store it somewhere, which is expensive. So while they were "paying you to take the oil" you couldn't really just jump on it and do it.
This is an analogous situation to what's going on with a negative interest rate. You're right, you're literally better off taking the money out into a pile of cash. And if you only have a few thousand bucks you could just do that (but then you need to drive to the bank, figure out how to store it, drive back when the rate goes back up, etc.) But if you have a few hundred thousand bucks - what are you gonna do? Cash it out in hundreds and keep it in your garage? At some point the logistics and theft risk of that adds up too.
Meaning, similarly to the oil example, while the raw numbers indicate one strategy, the practicality of carrying the asset on your own tends to outweigh the benefit. So yeah, someone may chose to incur negative interest if their only other option is to pile up cash in the house where they have to worry about it being stolen, burning in a fire, etc.
Gresham's Law is that "bad money drives out good" - when you have two forms of currency circulating within the economy and one is inflating at a faster rate than the other, people will tend to spend the inflating currency and hoard the appreciating one. The inverse of that is that they will tend to hoard the appreciating currency and spend the inflating one, i.e. as a store of value, nobody with long time preferences is going to hold cash. Instead they pile into any asset with zero cost of carry and a liquid market, which was stocks from about 1980-2010 and now also includes art, cryptocurrency, real estate, NFTs, other securities, etc.
It occurs to me that this could play tricks on how we measure interest rates. Assuming no central bank interference, interest rates are set at the equilibrium between people who want to borrow cash and those who want to lend cash. But nobody serious about future returns wants to lend cash! They've exited the cash market entirely, and only touch it when they need to convert long-term holdings to short-term holdings. Instead, they trade amongst themselves in asset markets, which have appreciated far quicker than 3% CPIs and 2% nominal interest rates would suggest. It could be that the divorce between stock market returns (10-15% in recent years) vs. interest rates (2-3% in recent years) might indicate that all of the firms with high time preferences have exited the cash market, leaving behind only those firms who need cash now.
Nitpick: It's the equilibrium between people who want to have savings and those who want to have debt. When you have deflation no such mechanism exists which is why the central bank has to set the interest rate manually.
I once met a woman for some short class on business plans on zoom, and she was actually taught how to create a holding and the whole loophole package to optimize taxes. I asked about the morality of such thing, and I was shocked to realize she did not seem to care at all.
The banality of evil allows some people to just get access to an easier life by not caring.
In fact, evading paying taxes in a legal way should not be an excepction, but the norm.
Stop romanticizing taxes.
I do not understand why you would personally care about profiting from tax fraud/optimization? I understand that it would be good to prevent this on a societal level, but no personally.
"Optimize taxes" - What exactly would be wrong with wanting to reduce the taxes you pay?
Did you ever calculate how much you are paying % wise in taxes? If you add all taxes including VAT, fuel taxes, random taxes and such you'll be suprised at the % you get "the priviledge" to pay as an employee every year.
Is the risk zero? No. Should you put all your funds there? No. But parking a small segment to balance out the negative bank yields is pretty attractive from a risk reward standpoint. If you’re getting negative 0.5% at the bank, you can protect your capital from decaying by moving 10% or less of your cash savings into DeFi.
Currently to get crypto on Coinbase or wherever, one needs to go through a crazy signup process where you deliver photos of documents that enables anyone who gets ahold of these photos to identify as you and use these to sign up as you on other places.
It is a catch 22. There should be a crypto way of doing KYC. Not signing up by delivering a photo of you passport, but by signing a message cryptographically.
1: You can walk into a bank and sign up for an account. You cannot walk into Coinbase and sign up for an account.
2: Most people already have a bank account. Most people do not have a Coinbase account.
Really? I'd like to see a civil suit where an institution says I owe them money and shows a picture of my ID as proof of contract.
There are ways of signing legally binding things online (DocuSign for example, which AFAIK was actually tested in a trial in EU), but they have more sophistication than that.
What I mean is this: If online companies require a copy of some document as identification, then this document you just copied and sent out to them can be used to identify as you when signing up with other companies.
The old brick and mortar way was better: When you walk into a bank to sign up for an account, the bank now cannot walk into another bank as you.
A new crypto way would be better as well: Instead of copying data for identification, sign a message cryptographically.
Go on.
(this isn't an anti-crypto post, just making the point that 5% yields are not unique to crypto and that the choice isn't crypto vs. banks)
As far as I can tell, the risks of depositing stablecoins in something like Uniswap or Compound are the following:
1) The stablecoin might not be redeemable 1:1 for fiat in the future. Personally, I think this risk is negligible for USDC and minimal with DAI.
2) The smart contract code might have bugs leading to loss or theft of the deposited tokens. I think this is minimal with Uniswap or Compound. It's significantly higher with some other providers (which do seem to offer higher rewards, but not enough for my taste).
3) High Ethereum gas fees could make it very costly to withdraw your funds in the future. So far, I have seen these fees spike as high as US$200-300, but only for a brief period of time. Usually they settle back to $20-50. This might be the highest risk but is still acceptable, to me, anyway.
Taken together, these risks are well worth getting ~5% instead of 0.1%, to me. YMMV, of course.
I'm a big believer in crypto, but I don't think stablecoins are it.
CDs and treasuries and commercial paper are pretty solid stuff - but they definitely aren’t cash.
https://www.bloomberg.com/news/articles/2021-08-23/coinbase-...
I don't know how you feel about short term treasury bonds, but I think they are nearly as good as cash. Slightly less liquid but with some return.
I mean, what became of the business where entrepreneurs go to a bank and loan money to finance building new ventures? For that the bank needs money, right?
So I guess that they don't want money from customers anymore means they get it from elsewhere. Probably from the government in the form of permission to print money?
Let me know if I am wrong here.
So no, banks don't lend other people's money. Not a single bank in the modern world lends other people's money.
Bank lending in fact CREATES deposits. All the money you have in your bank account came from either A) Government spending B) Someone took out a loan. Either public spending or private debt.
See: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
So a bank run could be done online? If enough customers of bank A send money to bank B, then bank A has to file for bancruptcy?
That's easy then. In case of a bank run, just give everyone their money back. They never loaned their customers' money, so they should have 100% of it ready to go.
Imagine a new bank with no money and no customers.
First customer walks in "Can I loan $100?".
Bank: Sure. We make an account for you. Your account number is 1. Your balance is $100.
Next day the customer walks in again. "I'd like to get my $100 in cash to go shopping".
Bank: "Uh oh. Sorry, we have to file for bankruptcy."
The things that are very wrong that are causing it, have come into existence. It started in EU country central bank lending to banks. Now end consumers are seeing that in their personal banking.
Imaging a world where the Dutch now have a "bank" that is over the internet in another country. Their money is stored in USD stable coin, or another countries stable coin. Citizens could flee there, in mass.
First, the country (Netherlands), would try to stop the on-ramps. But sooner or later, there will be other entrepreneurs who make easy ACHes/wires that re-route to a crypto account and buy-into crypto (like a USD stable coin).
Then the country in mass, could move their bank accounts out of the Netherlands. Then banks in the Netherlands could collapse... ....or be replaced by a healthy alternative (foreign USD Stable coin backed accounts).
Then the massive fundamental problems going on in macroeconomics that cause the negative interest rates will become visible. These problems remain hidden from the citizen-base because of how technical they are. It would require they be fixed, instead of draining money from citizens to put-their-finger-in-the-dike patching the problem.
I don't fully understand your dutch over the internet bank stablecoin comparison, but if you mean that people could flee into different currencies than this is not new at all, some years ago this happened already with the swiss franc. It's also not hidden because there're well enough economists talking about the implications, it's not as complex as you think and yes people with money in the bank are going to be expropriated but this happens anyway if you print more money.
So if you have 100k€ in the bank in Germany, that bank has to pay for 4k€ - that's just 20€ per annum and charges you 250€ (assuming a typical 50k€ exemption). At the same time they can lebd out 90k€ at a market rate of 1.5% to finance some housing. That's 1350€ revenue per annum. So in this simplified, idealized case, the bank just asks you to increase their revenue by 17% out of your own pocket.
The only case when the bank has to pay more is when they don't hand out enough credits and whose fault is that, frankly? Who should carry that risk?
In short, low interest rates are obviously a factor, but banks didn't have to do this. They're charging you because they can and because most banks are following suit.
At least in the UK, you're typically not charged for having a basic bank account; fancier ones do have monthly charges.
This verges on pedantry in this context. Banks are required to have a certain amount of capital in reserve to make loans (the reserve requirements and capital adequacy ratios set by central banks). Deposits from consumers give the banks the reserve capital they need to make those loans.
Without a way to use the deposits to make money the banks would just as soon not have your money.
Those are 0% or effectively zero in most developed nations.
Not if these loans are secured then they can make as much money as they want from thin air.
> Deposits from consumers give the banks the reserve capital they need to make those loans.
No. At least in the US, they just need to secure the loan with an asset that can be held from the dealers. Most of the time, if you got your mortgage from a bank, they'll just liquidate for real cash.
> Without a way to use the deposits to make money the banks would just as soon not have your money.
Which is why, in this new system, banks have become hostile to customers. Banks are no longer in the business of helping customers but trading money market funds.
Banks grant credit (bank money) when debtors promise to work.
Your money is effectively a share in the bonds that banks hold onto. In other words, the point of banks is not for people to store their money and earn interest, it's to provide liquidity and a trusted intermediary. When the bank pays interest it basically tells you to keep your money to make room for the investment spending. You and a company want to buy a car, you say the company should go first and you wait until the next car is produced.
In theory you could do the same thing without the bank by writing an IOU saying you work x hours and then use that as money. The problem is that people have to trust you and the IOU is not fungible (it may be worth $4k when all you want to buy is $50 worth of groceries).
https://youtu.be/xkQn56Dtslk
There is just SO MUCH cash right now in the hands of the wealthy classes and it's just sitting there in bank accounts not being circulated.
The only outrageous wealth you listed was real estate because of the land component. Nobody gets hurt by stocks. People get hurt if money ceases to circulate because money is needed to pay incomes, taxes and debts. If all the money piles up in one bank account everyone stops working. Meanwhile if one person owns all the stocks people can still work and be happy.
I know you didn't mean it quite so literally, but this paints a rather dystopian picture: a single person holding effectively all the material wealth while everyone else happily shows up every day to work for them
Note that low interest rates affect those with money (i.e. not poor) much more than those without much money.
I also didn't say the purpose is screwing poor people, but like many other things like car emissions caps, they introduce new regulations and laws and bullshit without thinking the poor are often disproportionately affected by them.
I disagree, wealthy people (even middle class) don't hold cash, they invest it
Yes, and the reason they can't make enough is because central banks are pushing down interest rates in order to nudge people into spending vs. saving. If central banks were not acting as a lender of last resort (at record low interest rates no less), the cost to borrow would be higher, and savers would likely be seeing higher interest rates.
Also, central banks have a mandate to be the lender of last resort. It’s one of their most fundamental duties and they’ve been doing it for as long as they’ve existed.
We don't know that, do we? It depends on the supply and demand for savings.
No, its not.
The Fed Board of Governors (like other independent federal agencies) is independent within the government; which is a term of art for executive-branch agencies with leadership board/council/commission that have terms (both length and staggering, usually) and partisan composition rules which prevent them from being reshaped over a short term to reflect the partisan interest of the current President and/or Senate majority, even when those are aligned.
Because its powers are assigned by Congress under law and freely changeable by Congress through new law, it is not and cannot be independent of government (even of by “government” you mean only the President and Congress.)
I am not familiar enough with the federal reserve to say how similar they are.
Positive interest is compensation for delaying spending and a fee for staying in debt.
Negative interest is a fee for delaying spending and compensation for keeping others in debt.
It's not about "governments thinking", it's about maintaining the balance of supply and demand between debt and credit.
The fact that you desire to hold onto money at 0% just shows how profitable it is.
https://youtu.be/j5l_Oeg6kMo
Gas prices increased by 4% in just last 3 months:
https://www.mwv.de/statistiken/verbraucherpreise/
The most food prices increased by 5% - 20% in the last year:
https://www.az.com.na/nachrichten/nahrungsmittelpreise-gesti...
Citation needed.
E.g. young people are more likely to rent than owning an appartement. But the general inflation reflects only the average spending on housing. So if 50% of the population owns a home, rising rents are only reflected half as strong for the general population.
However I could not find any reliable numbers how strong the contrast for each demographic group is...
source: https://de.statista.com/statistik/daten/studie/1045/umfrage/...
gas prices in germany are highly volatile in general. It is currently as expensive as it was 2012.
source: https://www.adac.de/verkehr/tanken-kraftstoff-antrieb/deutsc...