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Germany's Commerzbank is studying the possibility of storing billions of euros in reserves in the form of cash, according to Reuters based on two anonymous sources. This allows the bank to avoid the 0.4% penalty interest that banks currently have to pay to park reserves with the ECB. The rumor could not yet be confirmed.
If Commerzbank really intends to hold cash on a large scale, it would be the most substantial protest against the ECB's monetary policy. A policy that is especially criticized in Germany, including by Finance Minister Wolfgang Schäuble.
Earlier this year, a bank from the German state of Bavaria also came up with the idea of holding reserves in the form of cash. This will become a popular escape route, especially if interest rates on savings also turn negative. With the ECB's current monetary policy, this seems only a matter of time. During the last press conference at the beginning of this month, Draghi said that interest rates will remain low well into the future and may even fall further.
A balance in a bank account can be taxed with negative interest. That's why cash is becoming more and more interesting, because you don't have to pay interest on it. And it's not just banks that can take refuge in cash, but also mutual funds and institutional investors. They are already dealing with this, with many government bonds in the Eurozone yielding negative returns.
It is becoming clearer by the day that the monetary policy of extremely low interest rates also has undesirable effects. For example, the revenue model of banks will also come under pressure in the event of negative interest rates. Instead of making money from savings, they almost have to put money on it.
The ECB has already bought more than €1 trillion of debt since the start of the stimulus programme in March 2015, but this has led to only a gradual increase in lending. Banks do not see sufficient opportunities to lend the money in a sensible way and are already parking a total of €850 billion with the ECB at the penalty interest of 0.4%.
It is not easy to convert billions in bank balance into cash. A €2 billion amount in €200 banknotes is equivalent to an 11-tonne stack of banknotes, according to Reuters calculations. That's half a truckload of paper money. It will not be easy to find a suitable safe room for this.
Instead of parking assets in the form of cash, banks, pension funds and insurers can also opt for gold bars in the vault. You also don't have to pay interest on physical gold, while it can represent more value than paper money for the same surface area.
