Macquarie research suggests NZ's major banks have more capacity than their Aussie parents to protect margins if interest rates go negative, by cutting term deposit rates

Macquarie research suggests NZ's major banks have more capacity than their Aussie parents to protect margins if interest rates go negative, by cutting term deposit rates

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12 Comments

They will need that margin to mitigate the cost of paying the government interest on the reserves they accept as settlement for selling government bonds to the RBNZ as counterparties to the LSAP programme, otherwise known as QE. A prolonged RBNZ policy posture employing negative interest rates will destroy the banks' profitability.

It's not hard to see where this is heading.

Not only will central bank digital currency kill the remaining 5,000 banks in the US (low interest rate policies have already killed thousands), but it's also against the US Constitution, which gives the right to coin money to the government, not a privately owned Federal Reserve Link

Federal Reserve Bank of Philadelphia says central bank digital currency will kill the banks: "Depositors internalize this feature ex-ante, and the central bank arises as a deposit monopolist, attracting all deposits away from the commercial banking sector."
Sovietisation. Link

True indeed. We have already seen it: a prolonged negative interest rates environment forced by the European Central Bank has already wrought havoc with many European's banks' profitability.

An important thing to consider in the current situation is that many people will be saving what they can to improve their personal resilience. COVID has taught many that a spend thrift attitude is no good if things go bad. Negative interest rates work against people trying to shore up their own resilience (or at least the banks will use them to do that), and therefore will further exacerbate an already bad situation.

The way around that is to buy what you need in the future, now.

But banking - at least the interest-charging portion of banking - has permanently become untenable. If they continue, it's at the expense of those who are forced to use them.

Am I missing something or what?
Won’t negative rates mean the reversal of an asset class? A deposit is now a bank asset, a bank loan now a bank liability.
If the banks revenue will come from depositors, it must be a bank expense to lend money (surely they can’t both be assets)?
So why would a bank lend money if creates a liability for them? What motivation would they have to lend?

I don't think nominal rates (i.e. what the bank offers you) go negative there rastus under a 'negative rates' regime. Real rates perhaps, but not nominal. Its just that the banks margins become so tight that it isn't a profitable business for them - see European banks under such conditions.

https://www.investopedia.com/terms/n/negative-interest-rate.asp

You sure. That link states borrowers are credited interest rather than paying interest to lenders.
So why would a bank lend money if they have to pay interest on it? This surely means they Are turning an asset into a liability? If my deposit is a cost to me (as the banks are stealing it) then it has become a liability to me...it’s costing me to have money in the bank.
Got me beat!

Rastus - retail borrowers rates will not go negative. Even in europe, which had some years of negative rates, not even retail deposit rates went negative let alone lending rates. The central banks aim with negative rates is to discourage the banks putting surplus deposit funds on deposit with the central and thereby pay them to take it off their hands - the intention is that they should lend it out to the public instead to assist driving the economy. In truth one outcome can be that because the banks current deposit margin will be wiped out, the banks raise their margins on their loans to borrowers which in theory could raise rates for borrowers, or at the very least, limit any further falls in lending rates defeating the purpose of the central banking acting in the first place..

Thanks for the explanations both.

My father lives in Spain. Transfered some funds from US tried to deposit in Spain got told by bank that they really didn't want it, suggested he put it in the share market which he duly did. I believe he is at the moment hoping to break even.

Need to Challenge you there Grant. My in-laws, in Holland, retirees on a pension are being charged for having funds on deposit. No interest is paid. the more they have on deposit, the more is charged. They are literally trapped; they cannot close the bank account and work with cash, but they have to pay fees every way to have the account. Negative rates are really bad for the average person.