Archive for March, 2013

Negative Rates

March 2, 2013

Negative rates on bank reserves acts as a fixed tax on the banking system. The only way for the banking system as a whole to reduce its impact is to expand by lending more, increasing the ratio of (untaxed) ‘bank money’ to (taxed) ‘base money’. Unlike conventional profit or transaction-based taxes, negative rates fall most heavily on the least active banks, those with the highest reserve ratios. Conventional taxes, since they discourage activity (lending), are passed from banks onto wider society in the shape of higher margins on loans and lower rates on deposits. Negative rates, on the other hand, cannot be passed on, since they force lending up – all of these additional loans will need funding, and so deposit-taking cannot be deterred by banks trashing rates to savers. Radical policy would replace conventional taxes on banks with a negative rate on reserves deposited at the central bank.