Negative deposit rates threaten the financial stability of major banks. In Germany, it seems that most financial institutions are hoarding cash reserves. A bank run may not happen soon, but it is better to be prepared for the worst.
Negative Deposit Rates are a Problem
Consumers are not too happy to see their bank balances reduce every year. Negative deposit rates will ensure banks can charge their clients for trusting them with their own money. It is far from an ideal situation. In fact, it has a lot of consequences for both the institutions and their clients alike.
German banks are already feeling the mounting pressure. So much even that cash hoarding is a very real problem in the country today. Negative deposit rates incur high costs, even for the institutions themselves.
With dwindling profit margins and fewer loopholes to exploit, making a profit is no easy feat. As such, new solutions need to be found to ensure that the cash reserves remain adequate. That is often much easier said than done.
An additional problem is storing all of this paper money. Despite having numerous vaults at their disposal, space is running out quickly. That only goes to show how ill-prepared German banks are for what will happen eventually.
Physical cash holdings of German banks surpassed $48 billion in December 2019. That is a near 300% increase compared to May 2014. For now, the trend shows no signs of slowing down, despite logistical issues along the way.
A Weakening Economy
The cause for this slew of problems isn’t difficult to identify. Europe’s entire economy has been teetering for several years now. Combined with international trade disputes, things will not improve right away.
While these negative deposit rates have advantages, they are negligible. Companies can lend more money at a lower rate, yet the expected “bull run” isn’t materializing.
Cash is the Better Option
In fact, several German bank “operators” dislike the ECB quite a bit. They deem it better to store cash rather than move funds to the ECB. While there are certain risks involved, it makes sense from a financial point of view. It is uncommon to see financial institutions recommend using cash in this day and age.
That advice also applies to consumers in Europe. Storing funds in cash is better than depositing it at any bank. Otherwise, purchasing power will begin decreasing almost automatically. Albeit the Euro won’t become worth “more” anytime soon, there’s no reason to give up financial control and be forced to pay for doing so.