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ECB Threatens Negative Interest Rates

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    April 24, 2014

    ECB president Mario Draghi has been making lots of noise recently about cutting interest rates because the euro is too strong and banks aren’t lending enough.

    Realistically, there’s not much room to cut with rates already at a rock-bottom .25 percent.Some suggest negative interest rates are just the ticket to spur lending. Should that happen, the Bank of New York Mellon Eyes Charging Clients for Euro Deposits.
     Bank of New York Mellon said it was considering charging clients for depositing euros if the European Central Bank decides to cut key interest rates below zero.

    The potential move by the world’s biggest custody bank comes after Mario Draghi, president of the ECB, said last week that the region could require “further monetary stimulus” to offset a strengthening euro.

    “If the eurozone were to go to negative rates that would actually present the opportunity for us to charge for deposits and we are giving that very serious consideration,” Todd Gibbons, BNY Mellon’s chief financial officer, said on a conference call as the bank unveiled its first-quarter earnings.

    Reflections on Forcing Banks to Lend

    For starters, banks lend when they believe they have creditworthy customers and lending is worth the risk.

    An attempt to make banks lend to non-creditworthy customers is not only foolish but reckless. How many times do we have to march down that path to prove it?

    Banks Should be Banks

    Moreover, and as I have commented before, banks should be banks. I see nothing at all wrong with banks charging a slight fee for deposits.

    Banks ought not be lending demand deposit accounts in the first place. The practice is fraudulent. Thus, it is natural for banks to charge for safekeeping of such deposits.

    If the ECB forces banks into a corner where they have to start charging for deposits, arguably the system will be better off for it.

    However, I cannot endorse the blatant manipulation of interest rates that has led to the low rates we see now. Interest rate manipulation does harm holders of interest-bearing accounts such as CDs who receive paltry returns for their investments.

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    Images: Flickr (licence attribution)

    About The Author

    Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.  Visit Sitka Pacific’s Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

    You are currently viewing my global economics blog which typically has commentary every day of the week. I am also a contributing “professor” on Minyanville, a community site focused on economic and financial education.  Every Thursday I do a podcast on HoweStreet and on an ad hoc basis contribute to many other sites.

    When not writing about stocks or the economy I spend a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com.


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