wallstreetexaminer.com / by Jeffrey P. Snider / July 31, 2017
When the Mario Draghi as head of the ECB first introduced negative rates in early June 2014, his reasoning was very clear. As he said in the opening of his statement imposing NIRP on Europe, “Today, we decided on a combination of measures to provide additional monetary policy accommodation and to support lending to the real economy.” The way in which NIRP (the only policy rate which was and has been negative is the ECB deposit account, the so-called floor of the euro money corridor) is thought to support loan creation is by penalizing banks for holding idle reserves.
It’s a tough sell to banks, for sure, but even more in terms of common sense. Broadly speaking, it’s very difficult to encourage a positive financial outcome with only a stick. Conventional wisdom suggests that low funding rates are the carrot, the incentive to make money on the curve. But that’s not how banking works, as the real issue is always risk-adjusted return. If returns are low and risks perceived to be high, then funding costs almost don’t matter.