tag:blogger.com,1999:blog-8764541874043694159.post8125024905305301211..comments2024-03-28T07:33:46.151+00:00Comments on Coppola Comment: The strange world of negative interest ratesFrances Coppolahttp://www.blogger.com/profile/09399390283774592713noreply@blogger.comBlogger67125tag:blogger.com,1999:blog-8764541874043694159.post-87196940254728002242020-05-11T14:19:07.370+01:002020-05-11T14:19:07.370+01:00Hi, I'm re-reading this post in 2020. I'm ...Hi, I'm re-reading this post in 2020. I'm just curious whether your opinion on how negative policy rate + tax on extra reserves should play out has changed. Maybe better said: now that this is all real, how is reality different than you expected? Or is the final paragraph of this post ... imminent?Toby Sterlinghttp://tobysterling.netnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-4597242391102711162015-09-19T06:18:37.038+01:002015-09-19T06:18:37.038+01:00Very informative and amazing work, can't imagi...Very informative and amazing work, can't imagine the amount of brainwork to sift through all the cause and effect in the economy. :) Are there any other alternative scenarios apart from the doom & gloom scenario? Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-28344778664056661252014-09-19T09:17:45.853+01:002014-09-19T09:17:45.853+01:00I think a like too.I think a like too.haircut stylehttp://www.haircutbackviews.comnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-51676705672188291742014-08-25T05:07:30.067+01:002014-08-25T05:07:30.067+01:00Thanks Nice and very nice for Article.Thanks Nice and very nice for Article.allaboutmeegohttp://www.allaboutmeego.orgnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-13634840060300339332014-07-04T03:48:29.136+01:002014-07-04T03:48:29.136+01:00Britain is the most highly geared society on the p...Britain is the most highly geared society on the planet (private and public debt combined), and when the markets pull the plug on this island nation, the fallout might make Greece look like a walk in the park.beautyhttp://www.beautyfullallday.comnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-30367612488499630242014-06-09T08:43:24.691+01:002014-06-09T08:43:24.691+01:00I'm obviously a bit late to this discussion, b...I'm obviously a bit late to this discussion, but found this post very enlightening nonetheless. Although I've tried to present a similar position before, this is far more comprehensive and deserved linking for a hopefully broader audience..!!agen judi onlinehttp://goo.gl/StzUWonoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-30554158707821807472014-03-01T02:45:55.064+00:002014-03-01T02:45:55.064+00:00I´d really like to know what are, in your opinion,...I´d really like to know what are, in your opinion, the rules or regulations that prevent a government-owned bank (or any bank, for that matter) from making a loan to the government and simultaneously create a deposit owed to the same government?haircuthttp://www.haircutbackviews.comnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-26704495925066339242014-01-27T10:27:15.308+00:002014-01-27T10:27:15.308+00:00Very good article and research on the neu bubble i...Very good article and research on the neu bubble in the housing market. Continues government interference has gone from being unwise to immoral.jolthttp://www.joltmediagroup.comnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-66343142919524675712014-01-24T07:30:59.474+00:002014-01-24T07:30:59.474+00:00Interesting post thanks.
The paradox of thrift......Interesting post thanks.<br /><br />The paradox of thrift...Dresshttp://www.dresscodela.comnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-47865134225534246762013-07-18T04:55:33.937+01:002013-07-18T04:55:33.937+01:00get cash
Lenders always like being able to contact...<a href="https://badcreditloans.net" rel="nofollow">get cash</a><br />Lenders always like being able to contact people and the more numbers you offer, the more comfortable they are. Vicentehttps://www.blogger.com/profile/12244752201018822964noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-77076547105776667482013-05-13T21:31:10.295+01:002013-05-13T21:31:10.295+01:00Jose, You need to make contact with Neil Wilson, w...Jose, You need to make contact with Neil Wilson, who I think explained this in exactly the way you have a year or more ago on Warren Molser's website. I think you have been very clear, thanks.SteveK9noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-42646769728755475042013-05-04T01:39:56.048+01:002013-05-04T01:39:56.048+01:00Like the new background image Frances. Seems like ...Like the new background image Frances. Seems like just what the NWO ordered! We'll see.....Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-89946230836284686632013-04-16T03:20:19.925+01:002013-04-16T03:20:19.925+01:00whoah this blog is fantastic i love reading your a...whoah this blog is fantastic i love reading your articles.You can learn more: <a href="http://www.chinatour.com/china-tour-package.htm" title="China tour packages" rel="nofollow"><strong>China tour packages</strong></a> | <a href="http://www.chinatour.com/china-tour-package.htm" title="China travel packages" rel="nofollow"><strong>China travel packages</strong></a> | <a href="http://www.chinatour.com/travel-agent.htm" title="China Travel Agency" rel="nofollow"><strong>China Travel Agency</strong></a>china tourshttp://www.chinatour.com/noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-49192893495057844762013-03-01T13:17:52.891+00:002013-03-01T13:17:52.891+00:00I don't think I suggested the banking system w...I don't think I suggested the banking system was perfectly competitive. I don't suppose you would disagree with me that banks are highly motivated by profits - and owing to public loss subsidy and underpriced liquidity probably much more so than a 'fair' market would tolerate? <br /><br />Can you explain why it took negative rates for Danish banks to 'wake up' to the opportunity of raising loan margins profitably - exploiting excess demand for credit - that you contend? <br /><br />Your prediction that banks will turn to Treasuries or proxies is reasonable. But holding Treasuries is not a one-way bet for individual banks, not now and not in a negative rate environment. As bonds are steadily bid up in price, holders would be assuming ever-greater interest rate risk (except on short-dated bonds). More pointedly, since bond supply is not limitless, turning to safe assets would also become principal-destroying, and banks would be no more inclined to hold negative yielding bonds than negative yielding base money. <br /><br />The response of individual banks to negative rates would probably be to push bond prices up. As you note, while making loans is self-funded by the resultant deposit (at least at inception), purchasing say bonds is quite different in that it needs to be prefunded (unless the bond seller is a customer of the same bank). For an individual bank, as reserves are removed from its balance sheet, this avoids the corresponding cost. <br /><br />For the banking system, however, there is no escape. The bond sale proceeds are reabsorbed into the system (if they ever left it), so while reserves may be juggled from bank to bank (your "hot potato"), there is no lightening of the overall tax imposed on the banking system. Unlike other taxes (eg on profits, transactions, etc) taxing reserves leaves the banking system with one method of reducing its overall impact: to expand.<br /><br />Therefore buying bonds offers banks collectively no reprieve because this activity does not expand broad money. It leaves systemic reserve ratios unchanged. Your prediction of bond buying may be valid, but it will quickly hit limits, individually (from negative yields/interest rate risk) and collectively (system-wide profitability). So I fail to see any reason to discount an uptick in bank lending following on the heels of such a policy in fairly short order.<br /><br />For what it is worth I also don't see much scope for banks to pass the "tax" onto non-banks. Banking expansion spells greater bank lending, all of which will need funding - much of it from depositors. Banks will have to be no less competitive with savers as they are now (however perfect) - and arguably there will be more competition for deposits. By the same token increasing lending requires banks to compete for borrowers too - so lending margins will (eventually) fall. The dead weight loss within banking, a symptom of its monopolistic character, would actually finally be squeezed.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-6211284315438898852013-02-28T18:58:55.429+00:002013-02-28T18:58:55.429+00:00Margin rises don't necessarily reduce profits,...Margin rises don't necessarily reduce profits, if the demand for loans is greater than the banking system's willingness to provide them - which is the case in Denmark, which is experiencing inflows of money from the Eurozone. The relationship between lending volumes (demand) and margin is rather more complex than you suppose, not least because the banking system is not a free market - it is possibly the most rigged and regulated market in the world.<br /><br />There is little chance that banks would seek to replace risk-free reserves with risky lending. They are much more likely to look for equivalent risk-free assets, as I said in the post. Therefore I do not see any prospect of negative rates increasing bank lending. <br />Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-18850009576536578262013-02-28T18:31:35.458+00:002013-02-28T18:31:35.458+00:00I have difficulty with this. Let's start from ...I have difficulty with this. Let's start from the premise that loan margins are set in order to maximise absolute bank profits. Ceteris paribus, any increase in margins will reduce profits by reducing demand for credit and with it loan volumes. Likewise any reduction in margins offsets any increase in volumes. If Danish banks raised margins in response to the imposition of a negative rates, this implies the market is far from competitive, according to the following logic. <br /><br />A negative rate is, as you point out, a fixed absolute cost for the banking system to bear because the volume of reserves is set by fiat. Now, for variable costs, ones that increase with lending activity (eg bank funding costs), the return on lending earned by the banking sector must, overall, also increase so as to preserve system-wide profitability. While (ceteris paribus) this will reduce borrowing, this is the necessary outcome in a competitive market because lending carries a higher cost. Lending has to fall.<br /><br />But as a matter of definition, costs that do not vary with lending do not fall if lending is reduced. So raising margins would have to offset at least in full the depressive effect on revenues of reduced lending, else system-wide profits will fall. And if this offset is achieved, then there would be no reason to wait until fixed costs have risen in order to achieve this efficiency. So the negative rate on reserves cannot account for the increase in margins observed in Denmark following this event - which is more likely to reflect banks colluding to blackmail policymakers. <br /><br />Imposing a negative reserve interest rate increases the costs on the banking system. But unlike a simple tax on bank profits, it falls most heavily on banks with the highest reserve ratios. Therefore individual banks will seek to reduce this ratio, trading any gains made against reductions in their liquidity/funding position. Plus ca change...if this increases overall bank lending, as it should, then this might be a useful outcome<br /><br />http://wealthoflabour.wordpress.com<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-78368293480721735682013-01-13T18:14:43.785+00:002013-01-13T18:14:43.785+00:00Thanks Scott. Thanks Scott. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-4422372921138194472012-12-26T21:48:12.192+00:002012-12-26T21:48:12.192+00:00I'm obviously a bit late to this discussion, b...I'm obviously a bit late to this discussion, but found this post very enlightening nonetheless. Although I've tried to present a similar position before, this is far more comprehensive and deserved linking for a hopefully broader audience http://bubblesandbusts.blogspot.com/2012/12/negative-interest-rates-represent.html.Anonymoushttps://www.blogger.com/profile/00720722626969395929noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-19412427232876885772012-12-23T17:34:42.476+00:002012-12-23T17:34:42.476+00:00Well, I'm glad we can agree that commercial ba...Well, I'm glad we can agree that commercial banks may lend to governments in the primary market - creating new deposits for the government in the process.<br /><br />And of course it's true than an asset purchase - say, the bank buying a Treasury bond in the secondary market - has different accounting entries since in this case the bank is not lending funds. It's buying a pre-existing asset from a third party (likely an institutional investor such as a pension fund) and it does have to possess in advance the necessary funds to buy said asset. In this case, it was the third party - not the bank - who lent funds to the government in the first place.<br /><br />As for what happens at the time of settlement - or more generally at the time the government uses its deposit in the commercial bank to make payments, either at home or abroad - the bank will credit reserves and debit a deposit. It will have to compensate for this negative position in reserves by borrowing from the central bank. And in the absence of a normally functioning interbank market (Europe post-2008) the NCB will simply have to lend said reserves back to the bank if it wants to keep the payments system working smoothly. <br /><br />Finally, we have the question of the putative negative reaction from the Bundesbank. <br /><br />I'd advise the periphery government to not pay any attention to the usual whining of the German NCB. <br /><br />Let it complain if it so wishes. After all, the Bundesbank has been protesting for years against every monetary measure designed to rescue the eurozone - against SMPs, OMTs, you name it - and yet said measures have gone ahead as needed, the German central bank's objections notwithstanding.<br /><br />The key point is the following: the Lisbon Treaty only forbids direct financing of governments by central banks, not commercial banks. Any complaint against using a commercial bank (even if fully or partially owned by a government) to fund the rollover of debt held abroad by transferring it to TARGET2 balances would have to be argued in court. It would be a true juridical battle. And I think it's fair to say that there would be a non trivial probabibility that the government might win said battle.<br /><br />So, considering what is at stake - overcoming destructive austerity policies in the periphery - it's reasonble to conclude that the government should go ahead with the process.<br /><br />In other words: just do it!Jose Guilhermehttps://www.blogger.com/profile/00313496015841693181noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-82306956079097448472012-12-23T13:01:40.529+00:002012-12-23T13:01:40.529+00:00Commercial banks can in theory lend directly to go...Commercial banks can in theory lend directly to governments. I'm just pointing out that the accounting for asset purchase does not create money in the way that lending does, so the bank must be funded in advance of the purchase. I would also like to point out that a loan to government would also have to be funded at time of settlement if the government wished to use it buy back debt held by domestic creditors and those creditors' deposit accounts were not held at the same bank as the one making the loan. The need for NCB funding is not limited to cross-border transfers. <br /><br />I think your three points are a reasonable summary. However, I disagree with you that the Bundesbank would not object: the Bundesbank has a horror of monetary financing of governments and would rather let banks go bust and sovereigns default than allow anything that smacked of "printing money" - which is how they would inevitably see state-owned banks lending newly-created money directly to government. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-61670346338709401972012-12-23T02:56:49.598+00:002012-12-23T02:56:49.598+00:00Well, I suppose we have to define precisely what&#...Well, I suppose we have to define precisely what's the difference between an asset purchase and a loan - and then decide whether banks can or cannot make loans to governments and create deposits for governments in the process.<br /><br />I´d really like to know what are, in your opinion, the rules or regulations that prevent a government-owned bank (or any bank, for that matter) from making a loan to the government and simultaneously create a deposit owed to the same government?<br /><br />Why is it that, in your view, any bank can lend to entities such as households or firms thereby creating deposits "out of nothing" - but cannot proceed in the same way with an entity called "government"?<br /><br />Anyway, if we can agree that it's at least conceivable to assume a situation where a bank is lending "created out of nothing" funds to a government there remains the question of deciding whether this could be seen as an instance of the monetary financing of governments forbidden by the euro treaties.<br /><br />I'd answer that it's impossible to tell in advance what would happen, because systematic rollover of government debt held abroad by using a government-owned bank has never been tried before.<br /><br />But I very much doubt the Bundesbank would complain, because while it's true that the German NCB would be accumulating credits over the eurosystem it's also a fact that this would happen for a good cause - that of guaranteeing that a German commercial bank will have its bonds being paid off at maturity.<br /><br />It would simply be another post-2008 instance of the banking sector of Germany transferring risks to the public sector - life as usual, considering the precedents :)<br /><br />Summing up:<br /><br />1. Can a commercial bank lend directly to a government, just like it does for a household or firm?<br /><br />2. Could such lending be seen as a violation of articles 123 and 124 of the Lisbon Treaty <br /><br />and <br /><br />3. Would this be a violation only when the lending bank is government-owned (at this point we'd also have to decide on the threshold - whether it's, say 51%, 90% or wholly government-owned) or would it also apply to lending by private sector commercial banks?<br /><br />These would be the questions to consider for a periphery government willing to analyse all possible strategies to escape from austerity.<br /><br />I hope you and I can at least agree on this summary. <br />Jose Guilhermehttps://www.blogger.com/profile/00313496015841693181noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-49348176351893655362012-12-23T00:43:59.936+00:002012-12-23T00:43:59.936+00:00Jose,
What is it about "it is an asset purc...Jose, <br /><br />What is it about "it is an asset purchase, not a loan" that you don't understand? The asset is bought. To buy something, the bank has to have funds - it can't invent them. "Fractional reserve" - loans creating deposits - applies to lending, not asset purchase. A commercial bank can no more create money to fund purchases than you can. It has to have funding or it can't make those purchases. Why do you think LTRO money was used to purchase new Spanish debt? According to your accounting Spanish banks could have purchased that debt without the LTROs - they could simply have created the money. It doesn't work like that. You must account for it in exactly the same way as any commercial institution making an asset purchase would:<br /><br />DR Cash<br />CR (Financial) assets<br /><br />funded by:<br /><br />DR Loan account <br />CR Cash<br /><br />The effect is that money is borrowed to finance the purchase of an asset. However, as banks don't have loan accounts (credit facilities), the funding entries would arise from a real interbank loan or NCB repo transaction. You can't simply assume this away. <br /><br />Because the government has an account at the bank, you then treat the payment to the government as a customer deposit, just as if a government official had come into a branch and deposited the money at the cashier's desk:<br /><br />CR Government deposit account (liability)<br />CR Cash (asset) <br /><br />The end result is that the government has a new deposit which is effectively fully backed with cash (like full reserve banking), and the bank has purchased a new financial asset funded by borrowing from the NCB. The NCB has therefore indirectly funded the government's new debt issue. If the commercial bank were a private or partly state-owned organisation it could be argued that the NCB's funding was for the bank, not the government. But a wholly state-owned bank is an arm of the government, so NCB providing funding to such an institution specifically for the purchase of government debt cannot be seen as anything other than monetary financing of government - which is illegal under the Lisbon Treaty.<br /><br />Your settlement accounting with the foreign bondholder using Target2 is correct. But as I keep saying, that is not the point. The real issue is the fact that bank asset purchases have to be funded.<br /><br />If the commercial bank lent directly to the government, rather than purchasing assets, your accounting would be correct because the loan would be self-funding. But the NCB would still have to advance funds to the commercial bank, just later in the process. It could therefore still be argued that this is monetary financing of government - and I have no doubt that the Bundesbank would argue exactly that. The legality of such an arrangement involving a wholly-owned state bank could be challenged in the courts. <br /><br />Please don't misunderstand me. I think the rules preventing central bank financing of governments are totally bonkers and causing serious tensions in the Eurozone. But as far as I can see your solution would require treaty change. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-2880887738670686982012-12-22T23:22:31.710+00:002012-12-22T23:22:31.710+00:00Sorry, I forgot to add the following comment on yo...Sorry, I forgot to add the following comment on your reply:<br /><br />"...this has nothing to do with Target2".<br /><br />It does involve TARGET2 the moment the payment to the foreign bondholder is made (using the newly-created government deposit).<br /><br />The foreign bondholder - let's say it's Deutsche Bank - will have a new asset on its books (reserves at the Bundesbank) and a new liability (the periphery government's deposit). And the Bundesbank will have a new liability: the deposit of the Deutsche Bank.<br /><br />The Bundesbank will thus have to create an asset to balance its books: an advance of funds to the periphery NCB.<br /><br />At the end of the day, this advance will become a credit on the ECB - and the periphery NCB will also have a debit position towards the ECB.<br /><br />And these entries on the accounts of the eurosystem (NCBs and ECBs) constitute TARGET2 balances.<br /><br /><br /><br />Jose Guilhermehttps://www.blogger.com/profile/00313496015841693181noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-70649370559943264472012-12-22T23:08:59.606+00:002012-12-22T23:08:59.606+00:00"Yes, the asset it is buying is effectively a..."Yes, the asset it is buying is effectively a term loan, but that is not how the accounting works".<br /><br />How does the accounting work, then?<br /><br />Either loans create deposits, or they don't. It's not possible to have it boths ways. <br /><br />Since in my model loans do create deposits, I cannot agree with you when you say that "...No new deposit is created: instead, the bank must either have or obtain sufficient funds to be able to pay government for the piece of paper it is buying".<br /><br />This would be the "deposits fund loans" model that you have rightly rejected in dozens of previous postings in your blog.<br /><br />IMO, the accounting for the government-owned bank proceeds in the following way, along the process:<br /><br />Step one (buying the government bond):<br />Assets: + government bond ; Liabilities: + government deposit<br /><br />Step two (sending payment abroad, 2 simultaneous accounting entries):<br />Assets: minus reserves at NCB; Liabilities: minus government deposit.<br />Asset: + reserves advanced from NCB; Liabilities. + advance of funds from NCB.<br /><br />At the end of this process the bank's books will be like this:<br />Assets: + government bond; Liabilities: + advance of funds from NCB.<br /><br />So the funds to send the payment abroad come from the NCB - it sends the needed reserves to the commercial bank and assures the payment will proceed smoothly and reach another eurozone country.<br /><br />Just what it takes to guarantee that the eurozone is - and will always remain - a single currency area.<br />Jose Guilhermehttps://www.blogger.com/profile/00313496015841693181noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-10112334044423365382012-12-22T22:31:04.861+00:002012-12-22T22:31:04.861+00:00No, Jose. The bank is not lending to the governmen...No, Jose. The bank is not lending to the government, it is buying an asset. Yes, the asset it is buying is effectively a term loan, but that is not how the accounting works. It is a purchase, not a loan. No new deposit is created: instead, the bank must either have or obtain sufficient funds to be able to pay government for the piece of paper it is buying. A periphery bank would almost certainly have to do that by means of a repo transaction with the NCB or the ECB. <br /><br />I should remind you also that even a direct loan to government would still have to be settled. The bank would have to obtain the funds to physically pay its government the money it has borrowed - or, if it is bounced directly to the foreign bondholder, to pay that bondholder the settlement amount. You really should read ALL of what I wrote about how loan accounting works. Yes, a deposit is created "ex nihilo", but when the loan is settled real funds have to be found, and that is done by borrowing. As I said, this has nothing to do with Target2 and everything to do with how commercial banks fund themselves. The funding requirement applies as much for transactions within a country as it does for cross-border transactions.Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.com