The Bavarian Savings Bank Association and large-denomination banknotes

The European Central Bank (ECB) interest rate for bank deposits is currently minus 0.4% and economic theory would predict that at a minus rate, depositors (and this includes companies as well as banks and individuals) would prefer to hold cash rather than pay the central bank to look after their money for them. It has to be said that this doesn’t appear to have happened on a large scale yet, but clearly one of the reasons why economists are interested in getting rid of cash is in order to allow the interest rates to go further into negative territory in order to stimulate economic activity over hoarding. Now, it clearly costs something to manage cash over and above the cost of managing an electronic deposit hence it is interesting to speculate what the crossover rate might be, the modern version of the old “specie point” at which it was cheaper to hold bullion for monetary purposes rather than paper instruments.

In Germany, this calculation is being made. The negative interest rate cost German banks about a quarter of a billion euros last year, which has set them thinking about how negative the interest rates needs to be in order to make it worthwhile to store cash instead of holding deposits at the central bank. The Bavarian Savings Bank Association has already sent around a circular to their members setting out their version of the calculation. On this basis, the crossover rate is actually less than half of the current negative rate: we’ve already crossed the crossover point, if you see what I mean.

With 1.50 euros plus insurance tax for 1000 Euro, the value would be at 0.1785 percent, below the ECB’s deposit penalty rate of 0.3 percent, it said. Additional costs for CIT or additional burglary protection are not taken into account.

From Penalty interest: Unions want money rather stash in the vault – SPIEGEL ONLINE

 This isn’t really a serious calculation because, as it says at the end, it doesn’t take into account the significant costs of cash in transit (CIT) or the additional security expenditure that would be needed to guard cash hoards. But it does make a fun point, at least to me, which is that the existence of the €500 notes has an impact on that crossover rate. Clearly, if the maximum denomination banknote in Europe was (as it should be) €50 then you will need 10 times as many of them to create a hoard of the same value and that means higher costs for storage and transport. Now that the ECB has decided stop printing the 500s, banks will have to store masses of 200s, so the cost of storage and transport will be higher (which, in turn, will put a premium on the 500s in circulation so that they will trade above par). Just as an indication, two billion euros in 200 euro notes weighs about 11 tonnes.

The calculation may not be complete, but it does make an interesting point, which is that although we have passed the crossover point already, no banks have to date decided to store their squillions under the mattress rather than leave them on deposit. Oh, wait…

Commerzbank, one of Germany’s biggest lenders, is examining the possibility of hoarding billions of euro in vaults rather than paying a penalty charge for parking it with the European Central Bank, according to sources familiar with the matter.

From RTÉ Mobile – Commerzbank may hoard cash to avoid ECB charges

Why on Earth would they want to do this? Does it really make any sense? Either they will be setting themselves for the biggest robbery in history when thieves eventually get in to the vault, or they will be incurring costs that are insanely high in order to prevent this. I hope they’ve got good insurance. Or perhaps they can crowdsource the security from loyal customers, as Barclays once did in the UK.

Bank customers had to stand guard after a branch of Barclays was left unlocked for almost four hours. Even the cashiers’ service area and the route to the vault were left open to passers-by in Leigh-on-Sea, Essex, on Saturday afternoon. The blunder was only noticed when a customer went into the branch to withdraw cash and found no staff present.

[From Blundering Barclays bank staff go home… and FORGET to lock up or set the alarms]

It seems to me that the costs of transport, security, insurance and so on are actually quite high, so the ECB will be able to push interest rates further negative before it gets close to a genuine crossover point that would see banks investing in larger mattresses. If the ECB wants to have negative interest rates in its monetary policy toolbox in the long term, however, it would make sense for them to institute discussions about a practical policy on a cashless Europe, a topic that I will be talking about with my good friend Geronimo Emili of CashlessWay at the end of his NoCashTrip3 at Pay360 in Liverpool next Monday. See you all there!

The Cash Menace up North

[Dave Birch] Linkdump points me to a speech by the Governor of the Swedish Central Bank who was (correctly) moaning about cash. Interestingly, given my proposed tabloid campaign, he specifically factors the cost of criminality into the cost of cash. There can only be one (cost-based) conclusion: end the unfair cross-subsidy of cash and make it compete with e-payments fairly and squarely!

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