# Introducing NIRP - Son of ZIRP!



## cynic (24 May 2014)

FRANKFURT said:
			
		

> The European Central Bank has a range of options to consider at its June 5 policy meeting and negative interest rates are among them, ECB Executive Board member Benoit Coeure said. Coeure told Polish newspaper Gazeta Wyborcza in an interview conducted on May 16 that if the uneven pace of the recovery was confirmed and if the ECB saw a risk of inflation being too low for too long, "we can take action in June". "We can act in various ways, depending on the situation," Coeure was quoted as saying, adding that interest rates "are low but they can still go lower". Cutting all three interest rates would imply pushing the rate on overnight deposits, now at zero, into negative territory, which would mean that banks would have to pay to park their money at the central bank. "Negative rates are one of the instruments available to us," Coeure said, adding that the Governing Council had discussed such a step extensively. "We are technically and legally prepared for such a possibility. And market participants are well aware that we are contemplating such a move," he said. Asked whether negative rates would discourage people from keeping their money in banks, Coeure said that depended on how negative the rates would be and indeed, rates that fell deep into negative territory could have an impact on depositors. "But a deposit rate slightly below zero does not necessarily imply that depositors would be affected, while still providing incentives for banks to lend more," he said. Coeure also said the ECB was keeping an eye on the euro exchange rate and to what degree it was affecting inflation. "And indeed, the strong euro is contributing to the current low inflation. Consequently, any further strengthening of the euro strengthens the case for more policy action by the ECB aimed at bringing inflation closer to 2 percent," he said. Asked about the risk of global currency wars, Coeure said: "As long as the exchange rates are driven by the various countries' internal situations and domestic monetary policy actions, this is not a currency war but an adjustment of exchange rates to the current policy, stemming from their economic developments," he said. "This assumes, of course, that exchange rates will adapt in a flexible way to the changes in economic conditions and monetary policy." (Reporting by Eva Taylor; Editing by Stephen Powell) ((eva.taylor@thomsonreuters.com)(49 69 75651244)(Reuters Messaging: eva.taylor.thomsonreuters.com@reuters.net)) Keywords: ECB/COEURE




It appears that a certain well renowned economist may have been correct when he assured his audience that "level[i.e.break even] was the new up" 

The mattress industry should do a roaring trade if such events come to pass!


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## waterbottle (25 May 2014)

So does this mean:

Depositors to pull out of banks -> bank run?
More money being poured into economy -> inflation?
Money more likely to be shuttled into riskier investments -> increased risk to economy?
Investors less likely to buy EUR -> increase in other currencies, particularly AUD?


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## cynic (25 May 2014)

Yes! In the near term those would seem logical, and let's not forget the currency war that would be likely to ensue!

Further to that, if one thinks simply about the deeper implications, one will likely arrive at the same conclusion as I  - the role of banks in society will be largely redefined by such a move!

To put it simply, the banks were once a place where people deposited funds which then attracted a token amount of interest. (In effect it was a relatively safe place to park money and there was a small monetary incentive for doing so.)

The banks could then use their accumulation of depositors' funds  to meet the regulatory requirements for the lending of much larger sums to the general populace. In return the bank would be paid interest by the borrowers (not the depositors!).

NIRP effectively reverses the polarity of the current to that engine! (That particular engine wasn't originally designed to operate in reverse!!!)

Normally investors desire potential reward in return for risks to their capital. Will anybody actually be willing to pay for the privilege of lending money to others?!!!

How on Earth is the economy going to work if Europe decides to go NIRP?


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## waterbottle (26 May 2014)

This is what I don't understand - why would you pay someone to take your money? Would you pay someone to work for them with nothing in return?!

Have NIRPs ever been implemented before in history?


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## cynic (27 May 2014)

waterbottle said:


> This is what I don't understand - why would you pay someone to take your money? Would you pay someone to work for them with nothing in return?!
> 
> Have NIRPs ever been implemented before in history?




Perhaps not NIRP as such, but apparently Japanese Government Bill yields have briefly turned negative:
http://www.nytimes.com/1998/11/07/business/international-business-zen-banking-japan-s-negative-interest-rates.html


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## DeepState (27 May 2014)

waterbottle said:


> This is what I don't understand - why would you pay someone to take your money? Would you pay someone to work for them with nothing in return?!
> 
> Have NIRPs ever been implemented before in history?




You would do it because they don't print enough cash to actually stash under your bed. Even if they did, you need to transport it, store it, guard it, account for it and stop it from rotting.  All this costs money too. So, essentially, cash type assets not in the form of actual M0 base money (notes and coins) need to go somewhere.  For technical (solvency related) reasons, they can't keep much of it on their balance sheets. One port of call (central bank) is happy to take it at a very negative rate of interest, so what is the next worst thing?  

If central bank current account rates (Denmark) or term deposit rates (Sweden) are negative, as they were in recent years, yields on close substitutes went negative as well in Denmark.  It was the least worst thing you could do.  

However, negative yields also occurred in financial markets outside of the central banks even if a NIRP was not introduced.  Negative rates outside of central banks have occurred in Denmark, Japan, US, Switzerland and France. It did not occur in Sweden. Negative yields for high quality instruments typically occur when demand for liquid instruments of high quality is exceptionally high.  This is typically the case during an acute phase of a banking crisis.  Whilst deposit rates for certain monetary facilities offered within the central banks might be higher, they do not offer the same liquidity or otherwise come with a stigma if utilised. Surplus bank liquidity seeks overnight rates in the form of collateralised loans.  This is achieved via a mechanism called repo.  The yield on these arrangements for high quality collateral like government treasury notes and bonds went negative in these circumstances.

This thread is about the possibility of the ECB introducing NIRP.  Draghi has been making noise about a form of QE as well at the conference currently underway in Sintra which will go beyond NIRP. Nonetheless, it is important to realise that the circumstances surrounding the ECB in relation to NIRP are nothing like the Danish situation and, instead, more like the Swedish situation. The greatest criticism is that NIRP won't do enough if introduced. Despite generating hype and hyperventilation, it is almost a non-event for the EZ. In any case, the sky did not fall on either Sweden or Denmark and their currency pegs to the Euro did not break either although it did help to reduce the rate of foreign reserves growth at each central bank. No deposit banks collapsed into a vortex when the policy was introduced. Deposit interest never went negative.  Denmark still produces Lego and Sweden still pumps out Volvos.  This money does not have to be shunted into unworthy lending either.

Cheers


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## cynic (5 June 2014)

Here I was thinking that Nero was the only one to fiddle whilst everything went up in smoke!

They did it!

They actually did it!!

Those sanity challenged excuses for sentient beings just tried to douse their fiscal flames with an even heavier dose of kerosene!

NIRP has arrived!


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## liezelB (14 June 2014)

Nice article. The Federal Deposit Insurance Corporation is an independent U.S. government agency that, in an effort to maintain consumer confidence in the U.S. banking system, insures deposits up to $100,000 in most U.S. banks and savings and loan associations. A recent Federal Deposit Insurance Corporation survey has found that more people are becoming unbanked, or are living without a banking account of any sort. They are slowly but steadily growing in number. These are loans that consumers may have no idea it’s made available to them. Borrowing money is a privilege, which consumers should take advantage, of but it’s of no help to you if you’re not familiar with the various types of loans out there for you.


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## DeepState (24 June 2014)

liezelB said:


> Nice article. The Federal Deposit Insurance Corporation is an independent U.S. government agency that, in an effort to maintain consumer confidence in the U.S. banking system, insures deposits up to $100,000 in most U.S. banks and savings and loan associations. A recent Federal Deposit Insurance Corporation survey has found that more people are becoming unbanked, or are living without a banking account of any sort. They are slowly but steadily growing in number. These are loans that consumers may have no idea it’s made available to them. Borrowing money is a privilege, which consumers should take advantage, of but it’s of no help to you if you’re not familiar with the various types of loans out there for you.




This is effectively moving deposits from Federally regulated banks into shadow banking.  This trend is also apparent in European lending.  It isn't such a feature in Australia.  RBA's Lucy Ellis (Financial Stability) recently indicated it was small and reducing. As you point out, disintermediation carries risks like not knowing if your investment is going to be made whole.  In the GFC, the Reserve Primary Fund - a money market fund - 'broke the buck'.  The run on money market funds that this created was huge and the FDIC actually extended deposit guarantees to these funds temporarily to prevent a worse meltdown.  The funding of the FDIC is a tiny sliver of all deposits and MMFs, but their backstop helped quieten things down.

The Fed is considering adding an exit fee to such products to reduce the chance of having a run on redemptions from these funds.  This is supported by some of the world's largest bond managers...who may, or may not, have an interest in this beyond financial stability.

In Australia, the legislation is such that runs can be alleviated by closing the exits.  Essentially, the law states that if the underlying assets become illiquid, you don't have to process a redemption.  That at least assists with obtaining a fair price for the assets rather than a fire sale, but most investors would not know that they are subject to a liquidity gate even if it is on page 77 of the PDS.

In China these 'Wealth Management Products' are essentially of the same class.  The performance of these is being implicitly supported by the PBoC...a form of FDIC support, if you like.


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