While in developing countries, banks are struggling for the attention of investors, in developed countries the situation is radically opposite. Why do developed country banks need our money? No reason! They would be glad to refuse deposits, but people themselves carry money, which makes the economy of their country only worse.
In the 2000s, countries such as Britain, Japan, the EU, and the Scandinavian Peninsula faced an interesting phenomenon:
- Frightened by a series of bankruptcies and defaults, commercial banks stopped issuing loans, preferring a policy of accumulating money. Especially this contributed to the year 2008. Even the term “liquidity trap” was introduced, which meant that banks, attracting deposits, did not allow them to lend, preferring to keep them in the accounts of the Central Bank. Accordingly, deposit rates crawled down.
- The population, whose mentality is “imprisoned” for the reliable storage of money, continued to carry money to banks. The idea of capital accumulation is very close to thrifty Germans, Swedes, Danes. But money should work, otherwise, the economy will not develop.
As mentioned above, in a simplified scheme, people carry deposits in banks, banks give loans for development, production, updating of technologies and equipment. If people bring money to the bank, there is a drop in consumer demand (logically, people already have everything. Why would they need another car, if you can take the money to the bank?). Enterprises that do not receive loans to reduce production. The lack of technology development and updating ultimately leads to structural economic problems.
There is one more thing. A strong national currency is unprofitable for exporters, because their revenue is in foreign currency, and they have to buy raw materials and labor with the money of their country. With both of these problems, leading central banks of developed countries faced.
In 2009, the Swiss Central Bank introduced negative rates for the first time in history, forcing commercial banks to pay for deposits. “Fee for storing money” – commercial banks went the same way with respect to individuals. The purpose of the Central Bank was to use the instrument of monetary policy to make money work – to revolve in the economy, bringing added value, and not to settle in bank accounts.
In 2011-2012, following the example of Sweden, other countries also introduced negative rates (Denmark, Sweden, Bulgaria, Japan, Hungary). The effect was unexpected:
- Denmark and Sweden managed to weaken the national currency, thereby supporting exporters. In Denmark, there was even a situation where banks paid extra to their borrowers on condition of mortgage lending (interest for the loan was not charged).
- German banks faced an outflow of funds from deposits of individuals, but the demand for safes increased. Here, it was practically impossible to force residents to invest in the same shares or investment funds.
- In Japan, negative rates did not help at all. Investors perceive the yen as a safe haven during financial turmoil, investing in it. The inflation target was not reached, the yen remained strong.
An alternative to negative discount and deposit rates (which did not always bring the expected effect) was “helicopter money”. This term was proposed in 1969 by Nobel laureate Milton Friedman. The idea was to drop money directly from a helicopter to saturate the economy with money and exclude banks from the quantitative easing chain. In 2016, in Switzerland, where negative rates did not play a full role, this idea was considered in a referendum. It is a surprising fact for developing countries: 77% of people refused to be handed out to them just like that for free, on average 2300 euros per adult and 570 euros per child.
The policy of negative rates has opponents. Their arguments: negative rates of banks, on the contrary, will contribute to the accumulation of money as a reserve pension pillow. Much is tied to whether pension funds are public or private. The monetary structure also matters. In Sweden, where about 2% of cash is left (that is, everything goes through banks), the idea of negative rates is working. In Switzerland, where this figure is more than 10%, it turned out to be more profitable to store cash at home than in banks.
And one more concern: attempts to refuse the money of the population and expand lending can lead to an increase in the number of unreliable borrowers. However, each country has its own monetary system. And as you can see in the examples above: some banks need money, but some not. All this depends on many individual factors. And economists themselves sometimes themselves do not know what this or that experiment can lead to.