Richard A. Werner — “Negative” Interest Rates and the War on Cash

Banks cannot lend out their reserves at the central bank. As we show in the book “Where does Money come from?”, banks’ reserves at the central bank are simply credits created by the central bank for the benefit of the banks – central bank money that cannot circulate in the economy.

As a result, negative interest rates on banks’ reserves at the central bank are simply a tax imposed on banks. So why would central banks impose new taxes on banks at this stage? The experience of Switzerland may provide answers: negative rates raise banks’ costs of doing business. The banks respond by passing on this cost to their customers. Due to the already zero deposit rates, this means banks will raise their lending rates. As they did in Switzerland. In other words, reducing interest rates into negative territory will raise borrowing costs!

Out of paradigm in other ways, though.

ProfessorWerner
“Negative” Interest Rates and the War on Cash
Richard A. Werner | Professor of International Banking, University of Southampton