Swiss alternative bank breaks negative rates taboo
news.yahoo.com
news.yahoo.com
You might ask, why on earth would I pay a negative interest rate on deposits if I can just keep my money under my mattress? And yes, you could do that, and some people will (or they'll move to a different bank). But then you can't pay with debit cards or use any of the other services provided by a bank, or benefit from its physical security. Those things do cost the bank money which has to be paid somehow, it was just hidden from you by the interest rate.
Even just plain banking for all is a not-yet-achieved state (much less free banking for all.) [0]
Excuse me?
Traditional banking typically consists of two SEPARATE functions.
1) The first function is the safe-keeping of deposits (for which a fee would normally be assessed as an actual commodity (gold, silver, etc.) would be stored, and you have to pay rent, security, etc. related to the safekeeping of that commodity).
2) The second function is loan intermediation (that is, matching up people who want to invest their money with people who want to borrow it -- as an investor you would receive a return on your money less fees assessed by the bank for determining who should receive loans). Certificates of Deposit (CDs) are the classic example of a bank engaging in this second function. CDs require you to relinquish your ability to withdraw your deposits for an agreed upon term.
Modern banking, however, muddles these two functions. Paper bills no longer represent specific quantities of physical commodities held for safe-keeping by the bank. They simply represent themselves, pieces of paper that people continue to accept as money because they were slowly weaned off of using physical commodities.
Further, banks are allowed to simultaneously loan out the money you have sitting in a savings account (and pay you interest on it) but also give it to you in physical cash should you demand it.
How can it be that your cash could be in two places at the same time (invested in a loan but also available for withdrawal)?
If you loaned your car to a bank, and they lent it out to someone else, could it simultaneously be available for retrieval by you and also continue to be loaned to someone?
Obviously not, it's no different with money. But, because cash is fungible, and most people don't withdraw all their money at the same time, banks are able to continue this charade, pretending like your cash is available for withdrawal while simultaneously lent out to someone else.
The only time that the charade becomes readily apparent is during financial crises. During crises people get nervous and start demanding their deposits in cash, if everyone should do so (a run on the bank), the bank would not have enough cash on hand to make good on their contractual obligations. The only reason the charade continues is because central banks loan banks more money during crises by printing more money out of thin air (of course, there's no such thing as a free lunch, money printing debases the currency, so anyone who holds cash loses).
[1] Estimates vary, but the consensus seems to be that less than 10% of "money" actually exists in printed bills/coins:
(a) Estimate 8.3% -- https://www.quora.com/What-percentage-of-the-worlds-money-is-printed-in-cash-bills-coins
(b) Estimate 8% -- http://www.howstuffworks.com/currency6.htmI'll assume that's your question in this response. Unfortunately there isn't a straight-forward answer, everything (precious metals, stock market, bonds, etc.) is more volatile than holding cash, but your cash is guaranteed to go down in value over time due to money printing, so you get screwed if you do nothing.
There are too many permutations and personal situations to offer a one-size-fits-all solution, but I'll offer some general guidance.
If you're just starting your career, and don't have much to invest, you should just focus on becoming the best in your field, take advantage of any retirement matching that your company offers, and invest it in low-cost broad market index funds (like Vanguard's S&P 500 Index Fund VFINX is one example). Most people who don't have very much money worry about what to do with their money when they would get much better returns just by focusing on improving their skills!
If you have money to invest, you should read about value investing, I'd start with The Intelligent Investor by Benjamin Graham. Even if you don't want to manage your own money (and most people shouldn't unless it's going to be their full-time job), it will give you a great foundation for understanding the financial markets and how to evaluate people who you select to manage your money.
> on client deposits higher than 100,000 Swiss francs ($98,650, 92,420 euros).
The usage of a comma as both the thousands separator, and to separate two currencies - one using a prefix and the other a suffix - had me instantly googling the exchange rate rather than reading the rest of the article.
100,000 Swiss francs ($98,650; 92,420 euros).
$98,650; €92,420
Or
98,650 dollars; 92,420 euros
100,000 Swiss francs ($98,650 or €92,420).
However, I keep reading this in articles: "Although retail banks have yet to pass on that negative to rate to Swedish consumers".
What does that actually mean?
Why are the banks affected at all by what the government determines the interest rate to be? What is this charge they would be 'passing the charge on to consumers'?
It's not like the total amount of money in the bank mysteriously grows or shrinks based on the government stipulated interest rate every year, and I've certainly seen many places where banks refused to pass on interest rate changes to consumers in general.
Is this just the rate applied to treasury bonds? Or some kind of tax related thing?
The interest rates set by central banks are the (targets for) rates that regular banks pay (and receive) for interbank loans, and therefore represents the marginal costs that banks avoid by additional customer deposits. So, it makes sense for what banks are willing to pay customers for money to be influenced by what they would have to pay to replace that money via interbank loan.
> Is this the rate applied to treasury bonds?
Treasury yields are controlled by different mechanisms.
...surely, though, this means that it's only relevant if a broad number of banks decide to adopt the 'official' interest rate.
Unless there's some legal penalty to doing so, I don't understand why the swiss banks are simply refusing to adopt the -ve rate.
Central banks are often either governed in substantial part by member banks who are also the largest banks in the economy (as is the case with the US Federal Reserve) and/or have influence that can be used to align practical interbank lending rates with the target rates (if they didn't, rate setting would be immaterial), such as the ability to issue banknotes and lend them themselves at the target rate.
Something still doesn't make sense.
If bank A borrows $100 from bank B at 1% (positive) interest, then A has to pay back $101 to B.
If bank A borrows $100 from bank B at -1% (negative) interest, then A has to pay back $99 to B.
In the latter case, A would try to borrow as much as possible, and B would try to never lend anything.
What am I missing here?
This is the crux of the matter. Thier depositors are paying a mich higher fee by choice, in exchange for feeling good about their banking. I pay more for ethical food, clothes even childrens' toys to essentially make myself feel good/better about my spending.
This bank can get away with it. Other can't (at least for individual rather than institutional depositors).
It's also the Swiss government just asking depositors to put their money in some other country (or at least another currency). They want people to sell them in an effort to devalue their currency and help their local exporters.
On the 15.1.2015 they also changed the policy from fixed EUR/CHF exchange rate to negative interest rates to reduce the influx of money. Currently the rate at which the SNB borrows to the banks is -0.81% [2]. A friend of mine pays a premium of 0.75% on the base rate for his loan on the house, so the currently borrows from the bank at -0.06%.
So what else could you do with your CHF? Buy Swiss Confederation bonds, the current yield is also negative, -0.28% [2]. Or buy EUR, more risky but more interest? Put under your pillow, too risky? Exchange to gold, pay for insurance or to keep it safe? Bonds of a country nearby? Only 0.46% for 10 years in Germany [3] and in EUR.
[1] http://www.snb.ch/en/iabout/stat/statpub/zidea/id/current_in... [2] http://www.snb.ch/en/iabout/stat/statpub/zidea/id/current_in... [3] http://www.deutsche-finanzagentur.de/de/factsheet/sheet-deta...
The most interesting thing to me is that they are charging big depositors more than small depositors. This seems crazy given the costs of banks is usually considered fixed per dipositer. This could be more about the banks politics than actual banking costs, I suppose.