TheInterestRateunbound?
Jean-PierreDanthine+
May2016-Preliminary
1. Introduction
Since2014fivecentralbanks,includingtheSwissNationalBank(SNB),havesettheirpolicy
ratesbelowzero.InthisnoteIreviewelementsoftheserecentexperiences,focusingin
particularontheSwisscase.Idothisinsearchofapreliminaryanswertothequestion:do
thesedevelopmentsrepresentthepremisseofafullemancipationfromtheZLB?
Centralbanks’motivationsforgoingbelowzerohavebeendiverse.Theclearestcasesare
probablythoseofDenmarkandSwitzerland.Inthesetwocountriestheunambiguousgoal
wastoprotectanexchangerateparity.ThedaniskkronehasbeenlinkedwiththeEuro(and
beforewiththeMark)fordecades.Whenthecredibilityofthislinkcameintoquestionin
January2015,theCentralBankofDenmark(DNB)decidedtoimposeanegativerateon
commercialbanksdepositswiththestatedobjectiveofdiscouragingspeculationby
decreasingtheexpectedreturnoncapitalflowingintoDenmark.Withfoursuccessivecuts
overa2.5weekperiodtheinterestonbankdepositsreached-75bpbymid-February2015.
Withthepressureonthekronordiminishingtherewasthebeginningofareversal–amove
upto-65bp-inearly2016.
TheSwissNationalBank’s(SNB)decisionattheendofDecember2014wasofthesame
nature.Anegativeinterestrateonbankdepositsof-25bpwasannouncedonDecember18
(butthedecisionwastobeeffectiveonlyonemonthlater)withthegoalofalleviatingthe
pressurebuildingupontheexchangeratefloorrelativetotheEurothathadbeenineffect
sinceSeptember2011.Afurtherdecreaseoftherateonbankreservesto-75bpwas
announcedonJanuary15,2015,togetherwiththeabolitionofthefloor.Heretheobjective
wastoreinstateaninterestratedifferentialwithrespecttotheeurozone,inparticular,to
limittheappreciationoftheCHFthatwasviewedastheinevitableresultofabandoningthe
floor.
TheconstraintoftheZLBisparticularlyacuteforasmallopeneconomywithasafehaven
currency.PlacedinthisuniquesituationtheabilityoftheSNBtomaintainanegativeinterest
ParisSchoolofEconomicsandCEPR.PaperpreparedforpresentationattheBrookingsconference
+
on“NegativeInterestRates:TheLessonsfromEurope”,June6,2016.ThehospitalityofEIEF,Roma,
isgratefullyacknowledged.
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differential,notablywithrespecttointerestratesoneurodenominatedassets,iscriticalto
deliveranappropriateexchangerate.Historicallythisinterestrate‘bonus’,whichisthe
counterparttotheinsuranceagainsttaileventsthatisbundledwithaCHFinvestment,
exceeded150bp(forthe3monthLibor)asanorderofmagnitude(Figure1).By
compressingshortmaturityratestowardszero,theZLBmakesitimpossibletomaintainthe
interestratedifferentialattherequiredlevel,aconditionthatamplifiestheappreciation
pressuresaccompanyingtheoccurrenceofcrisis(whichexacerbatesthedemandforthe
safehaven).TheZLBthusrepresentsaparticularlysevereconstraintonSwissmonetary
policyandthestakesofremovingoralleviatingthisconstraintarecorrespondinglyelevated.
Asacomplement,letusnotethatthedomesticeconomyatthebeginningof2015was
healthywithexpectedgrowthabovepotentialandaboomingresidentialhousingsector.
Thatis,thestateoftheSwissdomesticeconomydidnotjustifylowerinterestrates;the
motivationforthepushbelowzerowasnottoprovideamonetarystimulustoaggregate
demand.
Exchangerateconsiderationswerelessdominant,althoughcertainlypresent,intheother
threecasesofnegativepolicyrates.IntheEMU,JapanandSwedenthemainintentionwas
tofightanundershootingoftheinflationtarget(theexchangeratewasoneofthechannels
throughwhichthepolicymovewasexpectedtodevelopitseffect).TheECBmovedits
depositrateinnegativeterritoryinmid-2014alreadyto“underpinthefirmanchoringof
mediumtolong-terminflationaryexpectations”(Draghi-2014).TheECBfurtherloweredits
depositrateto-20bpinSeptember2014and-30bpinDecember2015.TheRisksbank(10bpinFebruary2015followedbyfurthercutsto-25bpinMarch2015,-35bpinJuly2015
and-50bpinFebruary2016)andtheBOJ(-10bpinJanuary2016)usedsimilarwording.In
thecaseoftheRiksbank,negativerateswereannouncedsimultaneouslywiththe
introductionofQE.Theaimwas“safeguardingtheroleoftheinflationtargetasanominal
anchorforpricesettingandwageformation”.AfterseveralyearsofQE,theBOJimposed
negativerateswiththegoalofstrengtheningaggregatedemandandpromotinganinflation
rateclosertothestatedquantitativetargetof2%.Thegoalofdeliveringa‘traditional’
monetarystimuluswiththehopeofrevivingaggregatedemandandreachinganinflation
targetdistinguishesthesethreecasesfromthoseoftheDNBandSNB.
Adistinctivecharacteristicoftheexperienceofthefivecountrieswithnegativeratesisthat
theyhavehadnoimpactontheinterestrateappliedbybanksonretaildeposits.Thisseems
tobetheresultoftheresistanceofcommercialbankstoadverselyaffecttheirretail
customersforfearofseveringclientrelationships.Itisalsopartlyaresultofthepolicy
design,whichmayhavebeenintended,bythecorrespondingcentralbanks.Theprecise
designofthenegativeratepolicyiscountryspecific.Itdependsnaturallyonthepeculiarities
ofeachcentralbank’smonetaryoperations.Butitisalsoafunctionoftheimpactthe
adoptedmeasureislikelytohaveontheprofitabilityand,potentially,onthefragilityofthe
bankingsystem.Alleviatingtheburdenimposedbynegativeratesonbanksislikely
necessaryforjurisdictionswheretheimpositionofnegativerateshasbeenprecededbya
significantinjectionofliquidity(seeCechettiandSchoenholz,2016).Whetheritispossibleto
alleviatetheburdenonthebankingsectorwithoutatthesametimeweakeningornegating
thepotentialimpactofnegativeratesontheeconomydependsontheintentionsofthe
correspondingcentralbank.TheSwisscaseisagaintheclearestinthisrespect.Theinjection
ofliquidityprecedingtheimpositionofnegativerateshasbeenthelargestasashareofGDP
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withtheSNBbalancesheetapproaching100%ofGDP.Sincethetransmissionofthe
negativeratestobankcreditswasnotessentialgiventheexclusiveERmotivation,
exemptingbanksfromtheinterestchargewasrelativelyinnocuousprovidedmarginal
interestrateswereguidedtothedesiredlevel.ThisresultedintheSNBimposingalowrate
of-75bponbanks’depositsattheSNBwithalargeexemptionthresholdoftwentytimes
requiredreserves1.Iteffectivelymeantthatbankscollectivelyweresubjecttonegativerates
fordepositstotallingCHF170bil.whiletheirtotaldepositsamountedtoCHF473bil.asof
February2016.Itmaybenotedthatwithoutthisexemptiontheinterestpaymentfromthe
bankingsectortotheSNBwouldhaveamountedtoasubstantialfractionofnormalprofits.
FortheECBandJapanwhohadpreviouslyengagedinsignificantQEoperationsbutwhose
goalforthenegativerateswasbroader,thetrade-offismoredelicateanditisnotclearthat
theobjectivesofmaximizingthepolicyimpactiscompatiblewiththeperceivedneedto
sparebanks.
Itisworthsayingafewwordsonthepublicreactiontothisnovelpolicymeasure.Negative
nominalinterestratesarecounter-intuitiveevenwhennegativerealrateshavebeen
historicallyfrequent.ThedecisionoftheSNBtogonegativehasgeneratedalargeamountof
mostlyacrimoniousdiscussion.Thegeneralpublichasdifficultiesunderstandingthelogicof
negativeinterestrates.Theyareviewedas‘unnatural’andameasureoffinancialrepression.
Howcanitbethatasaverisnotrewardedforpostponingconsumption?Indeedtheworld
mustbeupsidedownwhenthelendermustremuneratetheborrower!Theadventof
negativerateshasexacerbatedthediscussiononthe‘spoliation’ofsaversthathadstarted
withtheeraofultralowrates.Thepensionfundlobbyhasbeenparticularlyvocal.By
imposingnegativerates,itissaid,theNationalBankmakesitimpossibleforpensionfunds
toreachtheirreturnobjectives.Thepublicinterestrequiresexemptingpensionfunds,in
particularthepublicsocialsecurityfund,fromtheinterestcharge.
Anotherdimensionofthepublicdiscussionrevolvesaroundtheexemptionpolicy.The
privatebank(wealthmanagers)lobbyhasbeentheloudest.Theincreaseinliquiditysince
thecrisishasbeendifferentiallydistributedamongthethreegroupsofbanksrepresentedin
Figure2withthe“otherbanks”,dominatedbytheprivatewealthmanagers,outpacingthe
othertwobankgroups.Thiscanbeseenastheadventof“cashinCHFattheSNB”asanew
‘ultrasafe’assetclassinthecontextofthecrisis,particularlypopularamongthewealthy
andconservativeinvestor-clientsofthesebanks.Theresultofthisdevelopmentisthatthe
definitionoftheexemptionthresholdasamultipleofrequiredreservesdidnotrelievethese
banksasmuchastheircompetitors,andtheyarebearingthelargestshareoftheburdenof
thepolicy.Giventheirreluctancetotransmittheinterestchargetotheirclientsinacontext
ofheightenedcompetition,theburdenpotentiallyamountedtoasignificantfractionoftheir
normalprofits.Ofcoursethisisnotincontradictionwiththeintentionsofthepolicywith
thesebanksbeingthusledtoproposeinvestmentalternativestotheirclients(notablyin
othercurrencies)andtoincentivizethemtochoosethesealternativesbyatleast
threateningtopassonthenegativerates.Butthelatterhasoccasionallybeenexploitedby
competitorswithfreemarginstoattractnewaccountsleadingtocriesofunfairnessandan
intensedebateandlobbyingeffort.Giventhetechnicalnatureoftheissueandthegeneral
CalculatedwithNovember2014asareferenceperiod.TheexemptionisCHF10miosforbanksnot
subjecttominimumreserverequirements.
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attitudetowardsnegativeratestheclaimofunfairnesshasattractedacertaindegreeof
sympathy.Allthisisrelevantbecause,inadirectdemocracy,evenlegitimateeconomicideas
havelittlefuturebeyondacertainlevelofunpopularity.
ThequestionIwanttoaddressinthisnoteis:dothesedevelopmentsportendthebeginning
oftheendoftheZLB?Therearetworelatedelementsoftheresponsetothisquestion.First,
onemustaddresstheissueofhowlowonecango?TheendoftheZLBisinsightonlyifone
cangosubstantiallylowerthanthecurrentlyobservedlowerbound.Afterall,ifthelatter,.75%,turnsouttobethelimit,themarginofmaneuveringforcentralbanksexposedto
permanentlylowratesisunlikelytobesufficient.ThisisnotablythecaseinSwitzerland
whererestoringthenormalinterestratedifferentialwhenthemajorcentralbankshave
theirpolicyratesatzerowouldrequirealargemovebelowzerobytheSNB.Butthisisalso
truemoregenerallygiventhatthemoreimportantimpactonlongratesisboundtobeonly
afractionofthecutinthepolicyrate.
Thesecondissuetobeaddressediswhetherthetransmissionmechanismremainsintact
underzero.Again,thedemiseoftheZLBwouldappeartobenearonlyifthetransmission
mechanismworkssymmetricallyaboveandbelowzero,oratleastifitisnotsignificantly
weakenedwhengoingnegative.Ilookatthesetwoquestionsinturn.
2. Howlowcanwego?
Therehasbeenamodestbutneverthelesssignificantevolutionofthoughtonthisquestion.
Afewyearsback,theZLBwastakenliterallyandleftunquestioned.SincethentheZLBhas
givenwaytotheeffectivelowerbound(ELB)!
Theissueiswellknown.Incurrent,universal,circumstances,therateofreturnonholding
papercurrencyisneitherpositivenornegative.Hoardingsignificantamountofpaper
currency,however,hasacostintermsoftransportation,safestoragecapacity,insurance
anditmayfurtherhavesomeinconveniencefeatures.Byaffectingthepossibilityofavoiding
negativeinterestratesonbankdepositsthroughpapercurrencyhoarding,thesecosts
definethelowerlimittonegativeinterestrates.Todaytheyappeartobe“oneinch”lower
thanwhatonewouldhavethought.AccordingtoBernanke(2016)theFedstaffconcluded
in2010thattheinterestratepaidonbankreservesintheU.S.couldnotpracticallybe
broughtlowerthanabout-0.35%.Otherestimateshadplacedthecostofcashhoardingat
closerto.50%.SincethenbothDenmarkandSwitzerlandhavereachedthelevelof-.75%.
withoutunleashingarushforcash.Itisnotclearthatonecangomuchlowerformuch
longer,however.Switzerlandisanexpensivecountry.Thevariouscostsmentionedabove
maywellbealittlehigherthanthecorrespondingestimatesfortheUnitedStates.
Switzerlandisalsoasmallcountrywheremoralsuasionbythecentralbankcanbeeffective,
atthemargin,inpreventingbanksfromtakingactionsthatcouldbeviewedasundermining
amonetarypolicydecisionofimportanceforthecountry.Fromapurecostperspective,itis
likelythatcashhoardingstartsjustifyingitselfinthevicinityofthecurrentrates.
Togosignificantlylower,thecontextmustbealteredquitefundamentally.Inordertothink
aboutthisissueletmestartwithanassumption.ItisthatCentralBankswouldwanttoavoid
papercurrencyhoardingbythegeneralpublic(ashasbeenthecasesofar).Centralbanks
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havealegalobligationstoprovidethenationalmeansofpaymentandtheyholdstocksof
papercurrencytomeetsuddenincreasesinthedemandforcashbuttheytypicallydonot
storeenoughbillstomeetdemandifpapercurrencyhoardingweretobecomepervasive.
Rationingpapercurrencytopermitarbitrarylowinterestratesisnotpartofasustainable
monetarypolicy.Yetifratesweretofallmuchlowerandwereexpectedtoremainlowfora
longenoughperiod,andifretaildepositorsweresubjecttothesenegativerates,thenpaper
currencyhoardingbythepublicwouldlikelybecomeprevalentandthefirstindicationsthat
acentralbankmayhaveaproblemmeetingthedemandforcashwouldonlyacceleratethe
move.IpostulatethatthepreferenceofCentralbanksistoavoidriskingsuchanoutcome.
Twodirectionstoavoidpapercurrencyhoardingbythepublicwhilepermittingarbitrarily
lowinterestrateshavebeensuggested.Thefirstconsistsinabolishingpapercurrency
altogether(e.g.,Buiter,2009,Rogoff,2014),theotherconsistsinsubjectingpapercurrency
itselftonegativeratesbyintroducinganexplicitexchangeratebetweenpapercurrencyand
electronicmoney.Withpapercurrencysteadilydepreciatingagainstbankordigitalmoney
oneeffectivelygeneratesanegativeinterestrateoncurrency(AgarwalandKimball,2015).
Thefirstisclearlymoreradicalthanthesecondandindeedthelatterwasguidedbythe
objectiveofproposing“apolicyataminimumdistancefromthecurrentmonetarysystem”.
Nevertheless,directlyexposingthegeneralpublictothenegativeinterestratepolicywould
beasignificantdeparturefromthecurrentsituation.Forreasonstobediscussed,noneof
thesealternativesappeartobeimmediatelyavailable,certainlynotintheSwisscontext,as
bothwouldrequiresignificantlegalchanges.Iwillpresentamoremodest,lessradical
optionthatmightbewithinreach.Theideaistopermitimposingsignificantlylowerrates
whilesimultaneouslymakingsurethenegativeratesarenottransmittedtothegeneral
public.Theimpactofthiscompromiseonthetransmissionmechanismisnotnegligible,
however.
Abolishingpapercurrency?TheSwisslovepapercurrency.Contrarytowhatisobservedin
Sweden,theuseofcashinSwitzerlandisstillverycommonincluding,incertaindomainsat
least,forlargepayments.AsFigure3shows,thedemandforpapercurrencystopped
decreasingasaproportionofGDParound1990andithasincreasedagainasaconsequence
ofthecrisissince2008.IncidentallytheincreaseoflatehasbeenconcentratedonCHF1000
billbutitdoesnotcorrelatewithanincreaseincriminalactivities.Itisperfectlytimedwith
theadventofthefinancialcrisisthatcausedanincreasedmistrustofthebankingsystem.A
proposaltoabolishpapercurrencypaymentswouldforsureprovokeaverylivelydebate
withargumentsbearingonsafety(theftvs.cybertheft),cost(theuseofpapercurrencyis
viewedasfree,creditcardchargesarehigh)andtheprotectionoftheprivatesphere.It
wouldbecertaintoendwithapublicvotewhoseoutcome,asoftoday,couldsafelybe
predictedtobearesoundingNO.Allinall,my(Swiss)takeisthatpapercurrencywill
circulateforawhilelonger,maybeuntilthecentralbankisreadytoissuecrypto-currency
ratherthaninpaperform.Anewpapermoneyserieswasjustputintocirculationafewdays
ago(April2016)replacingaseriesthatwasintroducedbetween1995and1997.Itcanbe
expectedthatthenewserieswillcirculateatleastuntil2030.
Thesecondapproach,forcingnegativeratesonpapercurrencybyintroducinganexplicit
exchangeratebetweenpapercurrencyandelectronicmoney,isattractivebut,in
Switzerlandatleast,itwouldequallyrequiresignificantlegalchanges;notablybutnot
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exclusivelybecausepapercurrencyisthelegaltenderwhichwouldhavetobereplacedwith
electronicmoney.Inandofitself,suchalegalalterationwouldprobablybewithinreachbut
viewedasameanstoreachingthegoalofpermittingtheextensionofnegativeinterestrates
toretaildepositors,theoutcomewouldbemuchlessclear.Thepublicdiscussionwould
surelyfocuslessonthemeansthanonthegoal.Asarguedabovetherecentexperience–
admittedlyveryshort–withnegativeratesshowsthatthegeneralpublicseesthemas
counter-intuitiveandunnatural.Thenegativereactionshavebeencontainedbecausethe
maninthestreetwasnotaffectedexceptindirectlyviahispensioninvestments.Cries
againstsuchapolicyaresuretobeevenlouderwiththeprospectofeveryonebeing
exposedtoanegativeinterestbothonhisbankdepositandonhispapercurrencyholding.
Hereaswelladifficultdemocraticdebateissuretotakeplace,theoutcomeofwhichwould
behighlyuncertain.
ForthereasonsjustdescribedIbelievenoneofthesechangesisreadilyavailableatleastfor
thecentralbankofaconservativecountrywithdirectdemocracy.Thereexistshoweveran
intermediateoptionforwhichtheSwissexperiencemaybeseenasaprelude.Itwould
provideapractical,almostready-to-adoptalternativetoenforcingasignificantlymore
negativeinterestratepolicy.Theideaistoimposeafeeonwholesalecashtransactions
betweenthecentralbankandcashhandlerswhilesimultaneouslyensuringthatthecostis
notpassedontoretaildepositors.Tomakethissustainableanecessarybutpossiblyalso
sufficientconditionistodesignatieredsystem.Withoutexemptingmostofbankreserves
eithertheburdenonthebankingsystemwillbesuchthatbankswillbeforcedtotransmit
negativeratestoretaildepositorsor,iftheyarepreventedfromdoingso,theinterest
chargecouldbecomeexcessive,possiblyleadingtobankfailuresandacreditcrunch,i.e.,
theoppositeofthesituationonepresumablywantstopromote.
Alleviatingsignificantlythefinancialburdennegativeratesplaceonbanksmakesitpossible
andlikelythatbankswillnotchargenegativeratesonthedepositsheldbyretailclientsasis
currentlythecaseinSwitzerlandandallothereconomicareaswithnegativerates.This
statementaccordswithbanks’observedreluctancetopassonnegativeratestotheirretail
depositors.Ifneedbe,thisstateofaffairsmaybeconsolidatedwithalegalobligation(sure
tobepopular)ofanon-negativeinterestrateondepositbalancesinferiortoacertainlimit
(saythe100klimittypicallyusedfordepositinsurance).Suchalegalobligationisineffectin
Belgiumforinstance.Oncethisisassured,asystemmustbedesignedtoavoidwholesale
cashhoardingbybanksandinstitutionalinvestors.Thiscanbeachievedinvariousways
dependingontheparticularinstitutionalset-up.InSwitzerland,forexample,asmallnumber
ofintermediariesareresponsibleforthetransportofcashtoandfromthecentralbank
meaningtrackingdownindividualwithdrawalsanddepositsisasimpleaffair.Thesimplest
systemwouldinvolveimposingafixedfeeonallcashwithdrawalsfromtheCentralBank
withanexemptionthresholdcorrespondingsaytotheaverageyearlywithdrawalofthelast
5years.Thatis,withdrawalsinexcessofthenormalusagedeterminedbytheneedsofthe
paymentsystem(correctedbyatrendifneedbe)wouldbetargeted.Alternatively,thefee
couldbeleviedoncashdepositstotheCentralBankanditcouldbemodulatedasafunction
ofthelengthoftimesincethecorrespondingwithdrawalthusneutralizingtheroleoftime
(asareasonablefixedfeewouldbetoosmallifthezerointerestpolicyisexpectedtolast
longenough).Onecouldaswellusethemoresophisticatedproposaltoimplementan
exchangeratebetweenpaperandelectronicmoneyatthewholesalelevelbutthisis
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probablyneedlesslycomplicatedgiventheintention.Herethegoalistopreventbypassing
thenegativerateonelectroniccashviawholesalepapercurrencyhoarding:arough
mechanismdesignsufficestoensure‘inmass’hoardingdoesnotpaywiththeresultthatno
feewilleverbelevied.Iamconvincedthatwithsuchasystemsignificantlymorenegative
interestratesthanobservedtodaycouldbeattained,sufficientlylowtorestorethe
necessarymonetarypolicymargininaworldofpermanentlylowerrates.Obviouslythe
modestyofthereformneededisnotwithoutanimpactonthecharacteristicsofthe
monetarytransmissionmechanism.
3. Isthetransmissionmechanismunaffectedbelowzero?
Whatcanwesayaboutthemechanismofmonetarytransmissiononcepolicyratesare
negative.Lessonshereareclearlypreliminary.Thisisthecasefirstbecausetheexperience
withnegativeratesisshortandadjustmenttimeisanimportantfactor.Theanticipated
durationofthepolicymattersgiventhatbehavioraladaptationshavefixedcosts.Second,
themodestyofthemoveonthenegativesideisalsorelevantforwhatwecanhopetolearn
fromthecurrentexperience.Mostratesarenotexpectedtogonegativeatapolicyrateof
lessthan-1%.Thethirdlimitationofthecurrentexperienceisthat,partlyforthereasons
justmentionedplustheprevalenttieringsystem,negativerateshavenotbeentransmitted
toretailsightdepositsinanyofthefivejurisdictionswithnegativepolicyrates.The
counterpartofthisfactisthatbankshavealsolimitedthetransmissionofnegativeratesto
theassetsideoftheirbalancesheet,i.e.,bankcreditshavenotadjustedoronlytoalimited
extent.
Marketrates.Inalljurisdictionswithnegativepolicyratesitappearsthatthetransmission
tomarketrates,shortandlong,onpublicandprivatedebts,hasoperatedinnormalfashion.
Thisisclearlythecaseformoneymarketrates(seeFigure4).Thisconformstowhatcould
havebeenexpected.Thearbitragingpossibilitiesbetweenlendingtothecentralbankand
lendingtotheinterbankmarketensurethatthemarketratecannotdeviatemuchfromthe
officialrate.Thedifferentialelementisprovidedbyexpectationsonceonemovesbeyond
overnightdeposits.Suchexpectationshavepushedthe3-monthLiborontheCHF
sometimessignificantlybelowtheratesetfordepositsattheSNB.Everywheretrade
volumesareverylowbecauseofsuper-abundantliquidity.Wheretheintroductionof
negativerateshasbeenaccompaniedwithafurtherincreaseinliquidity(Euroarea)trade
volumeshavebeenfurthernegativelyaffected.ThesituationistheoppositeinSwitzerland
wherethedesignoftheexemptionthresholdshasstimulatedovernighttradingbetween
banksbelowthethresholdwillingtoabsorbliquidity(ataprice!)andthoseabovethe
threshold.SeeFigure5.
Thetransmissionappearstohavebeensymmetricaswellforinstrumentsoflonger
maturity.Figure6showsthatthereactionofinterestratesonSwissgovernmentbondsto
theintroductionofnegativerateshasbeensignificant.Inacontextofdecreasingrates,in
particularatlongermaturities,onecannoteasilyisolatethepureeffectofthepolicymove.
Nevertheless,takingintoaccountthefactthattheSNBfirstannouncedtheintroductionof
negativeratesonDecember18,2014atalevelof-20bp,effectiveonemonthlaterandthen
afurtherdecreaseto-75bponJanuary15,2015,effectiveonJanuary20,thefallinrates
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overthetwomonthperiod–endofNovembertoendofJanuary–isthemorerelevant.The
one-yearbondratefellby72bpoverthisperiod,the5-yearfellby76bp,the10yearby38bp
andthe30yearby21bp.Inamoresystematicbutstillpreliminarystudy,Grisseetal.(2016)
reportnoevidenceofadeclineintheaverageeffectofshortratechangesonlongyields
whenshortratesmovetonegativeterritory.
Figure7reportsobservationsonborrowingratesinCHFfromnon-governmentborrowers
aroundtheJanuary15decision.ThesearedailydatacompiledbytheSNB.Theimpactofthe
decisiontoimposenegativeratesisclearlyvisibleincludingtheoverreactionregisteredinall
marketsonthedayofthedecisionandthecorrectionobservedinthedaysfollowing.The
moresolidborrowers,includingforeignissuersratedAAAandAA,couldborrowatnegative
ratesoverafewdaysinJanuary2015andagaininDecember.Therearenoindicationsthat
volumesofissuanceweremateriallyaffectedbythepassagetonegativerates.Butthe
evidencecannotbeviewedasfullyconclusiveheresinceonlyquarterlydataareavailable
andborrowingratesfortheseissuershavenotbeenactuallynegativemorethanafewdays.
Quantitativelytheimpactoncorporateborrowingratesaresmallerthanthoseobservedfor
governmentbonds.
Bankcredits.Incontrasttotheaboveobservations,theevidencesuggeststhepresenceofa
clearasymmetrywhenwelookatratesapplyingtobankcredit.Figure8suggeststhat
January15wasclosetoanon-eventforbankcredittocorporatecustomers.Althoughthe
firstmovetonegativeratesmayhaveinitiatedasmallreactionforlongermaturitycontracts
themovewasfullycompensatedwithinaperiodoftwomonths.Shorttermcontractsdid
notreactatallinthepredicteddirection.Figure9reportstheevolutionofmortgageratesof
variousmaturities.Thesearehighlyrelevantforthemonetarytransmissionmechanism
sincemortgagesformthebulkofcreditvolumesinmostadvancedcountries.Thisis
particularlythecaseinSwitzerland.Itappearsthatmarketmortgagerateshavenotfollowed
innegativeterritoryand,evenmoreremarkably,theyhavenotevendecreasedafterthe
introductionofnegativeinterestrates.Ontheonehand,itisreportedthat,witha
somewhatsurprisingdegreeofforesight,bankshadpreemptivelyadaptedthecontractson
variablerate(Liborplus)mortgagesandplacedazeroratelowerboundincaseofthe
referenceLibormovingintonegativeterritory.Thatis,therevisedcontractindicatedthat
thevariablerateconsistedofthemax(Libor,0)plusamargin.MovingfromazeroLibortoa
negativeLiborwasfromthisperspectiveanon-eventandaccordinglyelicitednoresponse
fromvariableratemortgages.Ontheotherhand,longfixedmortgageratesafteraslight
decreasefollowingtheSNB’sdecisiontogonegativereversedthenegativetrendthathad
beenobservedsinceearly2014andfoundthemselvesatapproximatelythesamelevelin
mid-March2015astheywereinmid-december2014,i.e.,beforethefirstannouncementof
negativeratesbytheSNB.Notethat,fromtheSNB’sperspective,thishastobeviewedasa
pieceofgoodnewssinceafurtherdropinmortgagerateswouldnothavebeenwarranted
giventhebooming(bubbly?)Swissrealestatemarket.
Howcanwemakesenseoftheseobservations?Thecriticalelementiscertainlythe
reluctanceofbankstopassonthenegativeratestotheirretaildepositors.WithSwissbanks
beinglargelyfinancedwithdemanddeposits(upto55%oftheirbalancesheetonaverage),
thismeansthatthebulkoftheirfundingisnotaffectedbythemovetonegativemarket
rates.Bankshavelogicallyattemptedtoprotecttheirprofitabilityandattheminimumthey
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havestrivedtoavoidlosingontheassetsidewhattheyhavenotbeenabletogainonthe
liabilityside.Anedoctalevidenceindeedconfirmsthatthedriverofbanks’reactionshas
beentheirfearoflosingprofitablelongrunclientrelationshipsgiventheperceived
resistancetothepolicymeasurebythegeneralpublic.Thefearextendstotheircorporate
clientswhoalsohavebeensparednegativeratesevensometimesonlargecashdepositsbut
whosecreditlineshave,forthemostpart,notbenefittedeitherfromthefall,allthistaking
theformofadelicateday-to-dayprocessofclientrelationshipmanagement.Bycontrastthe
largeinternationalbankshaveostensiblyimposedverynegativedepositrateson
prospectivelargecashdepositsbynewclients.Onthemortgagefront,Brupbacher(2016)
indeedcreditssome“heavyrepricing”,withmortgagemarginshavingmorethandoubled
(fromaround60bpaboveswapratestoaround150bp),forthereportedriseinnetinterest
incomebySwissbanks.Suchanapparentlyfragile(tocompetitiveforces)policymovemay
havebeenhelpedbytheconstantwarningoftheSNBthattherisksintherealestatemarket
wereataveryhighlevelandthatcautionwasinorder.Thismayhaveweakenedtheresolve
ofbankstocompeteonmortgagecreditvolumesandinducedthemto‘coordinate’onmore
restrictivemortgageapprovalpolicies.
ThecomparisonbetweenSwitzerlandandDenmarkishighlyinformative(seeFigure10).In
Switzerlandtraditionaldeposittakingbanksdominatemortgagecredit.Bycontrast
mortgagesinDenmarkareforthelargestpartofferedbyspecificinstitutionsthatfund
themselvesinthemarket.Theretailmortgagerateisthemarketrateaugmentedbythe
marginoftheintermediary.Whenmarketratesfellbelowzerotheseinstitutionsnaturally
passedonthefalltotheirclientsandindeedmortgagerateshaveadjustedandhave
sometimesfallenintonegativeterritory.Ontheotherhand,banksfinancingthemselves
throughclientdepositshavenottransmittedthenegativeratestotheirretailclientsbut
haverathertriedtocompensatetheeffectivelyflattenedyieldcurvebyincreasingfeesand
commissions2.Andbanklendingratesfornewloanstonon-financialcorporationshavebeen
reportedtohaveincreasedin2015.
TheDanishexperienceofcourseshowsthelimitsofthecurrentSwiss‘equilibrium’.With
timeotherintermediariescouldenterthemarketandoffernegativeratemortgagesthus
forcingbankstoreact.ThetwoexistingPfanbriefbanksareprimecandidatesforsucha
movealthoughtheymayhesitate(orbeprevented)tocompetewithbankswhicharetheir
mainbusinesspartners(andshareholders?).Thedurationandtheextentofthenegative
ratesareoftheessencehere.DomesticSwissbankscanillaffordtolosethemortgage
lendingbusiness.Werecompetitionfromnon-banksfundingthemselvesinmoneyandbond
marketsbecomehardtobearbankswouldhavetorespond.Thetemptationtotransmit
negativeratestoretaildepositorscouldthenbecomedifficulttoresist.
Exchangerates.ThemostoftenheardquestionaboutnegativeratesinSwitzerlandis:“can
youdemonstratethattheywork?”meaningthattheyindeedhelpalleviatethepressureon
thestrongfranc.Obviouslytheanswercannotbecategorical.Interestratedifferentialsare
typicallythedominantvariableinexchangerateequationsandthereisnoevidencethatthe
passageunderzerowouldlimittheirinfluence.Indeedonehasobservedsignificanteffecton
capitalflowsinDenmarkandonexchangeratesinSwedenandJapanaftertheirmoveto
2
AnincreaseinbankfeeshasalsobeenreportedinSwitzerland.
9
negativeratesbutasistypicalthesemoveswerenotisolatedeventsandotherthingswere
goingon.TheexchangerateimpactappearstohavebeenmorepersistentinSwedenthanin
JapanwhileinDenmarkthemovetonegativeratecanbeinterpretedashavingbeen
successfulineliminatingERpressures.IntheSwisscasethesimultaneouspolicymove(the
abolitionoftheERfloor)practicallyguaranteedastrongerfrancandthequestioniswhether
thenegativeratesmoderatedtheappreciation.Welackthecounterfactualbutallevidence
suggestthatthetypicaleffectoccurred.Thedropof75bpinthepolicyratecouldnotmake
upforthespeculativeexchangerategainsexpectedinvolatiletimesandwasasmallpriceto
payforaninsuranceagainsttherisksofaGrexitinthefirstpartof2015,butinmorenormal
timesoneexpectstheratedifferencetohelpthecurrencysettletoamorenormallevel.This
appearstohavebeenthecase(asofMay2016theCHFwasquotedabove1.10totheEuro,
alevelthatmanywouldhaveconsideredasuccessfortheSNBthedayaftertheabolitionof
thefloor)3.Anecdotalevidencewouldrathersuggestthatsomecategoriesofinvestors,at
least,dohatenegativeratesandmayreactmoreforcefullytoamovefrom0to-75bpthan
from+.75bptozero.Onthatscoreifthereisanasymmetry,behavioralbiasesmaycausethe
aysmmetrytobeinfavorofamoveinnegativeterritory.
Impactonbankprofitability.2015appearstohavebeenamoderatelygoodyearsforSwiss
banks.Theintroductionofnegativerateshasnotleftaidentiablemarkontheprofitsofthe
banks.Ineffecttheinterestchargehasmostlybeenpaidbyindividualorinstitutional
investorswhohavebeensubjecttoanegativeinterestbytheirbanks(notablyinternational
banks)andbyafewwealthmanagerswhohavechosentopreserverelationshipsrather
thanpassonthenegativeratetotheirclients.Forbanks,lowandlowerratesareexpected
tohurtincreasinglyastimepassesandoldercontractsarerenegotiated.Innormal
circumstancestheslopeoftheyieldcurveisthedeterminingfactorandtheyieldcurvehas
becomerathersteeper(Figure11).Therelevantyieldcurvemusthowevertakeaccountof
thefactthatratesondepositshavenotfallenbelowzero.Asindicated,sofarbankshave
beenabletocompensateontheassetsideoftheirbalancesheetbutitcannotbe
guaranteedthatthissituationcanpersistifnegativeratesweretopersistorfurther
decrease.Itisalsolikelythatsomebankshaveeconomizedoninterestriskhedginggiven
thatthepolicymeasurecanbeinterpretedasasignalthatrateswillstaylowforevenlonger
thanpreviouslyanticipated.ThisisallthemoresignificantbecauseSwissclientsare
increasinglylenghteningthematurityoftheirfixed-ratemortgages.Inothernegativerate
countriesitisalsoreportedthatbankprofitabilityhasnotvisiblysufferedbutcautionin
interpretingtheimpactoversuchashortperiodisequallywarranted.
4. Conclusions
Despitehavingsparedthegeneralpublicwhosesightdepositshavenotbeenaffected,
negativeratesarenotpopular.Thecurrentexperimentshavebroughtusclosetothelimitof
negativeratesshortoftakingradicalmeasuressuchaseradicatingpapercurrency.Mytake
isthatthegeneralpublicisnotpreparedtovoteforsuchameasure.Inadirectdemocracy
thismeansthattheroadisblockeduntilmindschange,whichmayhappenbutonlyvery
slowly.Elsewhereoneshouldbeveryreluctanttomaketechnocraticchoicesthatlack
3
Inits2015AnnualReporttheSNBreportspurchasesof86.1bill.eurosin2015.
10
minimaldemocraticsupport.Welivedangerouslyenoughinaworldofimportant
democraticdeficits.
InSOEswheretheinterestrateisasimportantforitsimpactontheERasitisforitsrolein
determiningdomesticmonetaryconditions,apragmaticapproachtomoredeeplynegative
ratesisconceivable.Itconsistsinimposingfeesonwholesalecashwithdrawals(ordeposits)
topreventwholesalecashhoardingwhilekeepingretaildepositorsoutofitbyexempting
thelargestpartofcommercialbankreserves.Thispossibilitycouldbeattractivefora
countrysuchasSwitzerlandenablingtheSNBtorestoreahistoricallynormalinterestrate
differential(notablywithrespecttotheeuro)andthustorecoverawidermarginof
maneuvereveninaworldoflowglobalrates.
ThisapproachtobypassingtheZLB,however,isnotwithoutitslimits.First,thecurrentSwiss
regimeofmortgagecreditbeingintermediatedbybanks,themselveslargelyfinanced
throughsightdeposits,isvulnerabletocompetitiveforces,inparticulartothearrivalofnew
entrantsofferingmortgageswithdirectmarketfunding.Second,totheextentthatnegative
ratesarenotpassedontoretaildeposits,theapproachoutlinedimpliesanasymmetrical
transmissionmechanism:bankslimitasmuchastheycanthetransmissionofnegativerates
ontheassetsideoftheirbalancesheet,thusprecludingafulltransmissionofthenegative
ratepolicytotherealeconomy.Thisrendersthispragmaticapproachtonegativerates
unattractivetolargeeconomicareasinneedofamonetarystimulusattheZLB.Forthe
lattermoreradicalstepsareneedediftheELBistobepushedmuchlowerthancurrent
levels.
References
AgarwalR.andM.Kimball,BreakingthroughtheZeroLowerBound,IMFWorkingPaper
15/224,2015
BallL.,J.Gagnon,P.Honohan,S.Krogstrup,T.Slok,TheLiquidityTrap:WhattoDoaboutIt?
ICMB18thGenevaReport(preliminarydraft-May2016)
B.Bernanke’sBlog-March182016
BechM.andAytekMalkhozov,Howhavecentralbanksimplementednegativepolicyrates?
BISQuarterlyReview,March2016
BergJ.,DanishsupervisoryauthorityinterviewinInstitutMessine,Tauxd’intérêtnégatifs–
DouzeRegards,janvier2016
D.Brupbacher,Negativeinterestrates:theSwissexperience,UBSGlobalResearch,March
2016
BuiterW.H.,Negativenominalrates:threewaystoovercometheZero-Lower-Bound,NBER
WorkingPaper15118,2009
11
CecchettiS.andK.Schoenholtz,Howlowcantheygo?e-axes,March09,2016
GrisseC.,S.KrogstrupandS.Schumacher,Theresponseoflong-termyieldstonegative
interestrates,Incompletedraft,April2016
RogoffK.,Costsandbenefitstophasingoutpapercurrency,NBERMacroeconomicsAnnual
Conference,mimeo2014
12
Figure1–TheSwissinterestrate‘bonus’
8
7
6
5
4
3
2
1
0
200
0
200
1
200
2
200
3
Libor- CHF- 3m
200
4
200
5
Libor- USD- 3m
200
6
200
7
200
8
Libor- EUR- 3m
Figure2–Commercialbanksdifferentiallyimpacted
13
Figure3–Switzerland:RatioofpapercurrencyincirculationtonominalGDP
Source:SNB
Figure4-Keypolicyratesandmoneymarketrates
Inpercent
1
TheovernightSwissaveragerate(SARON)replacedtherepoovernightindex(SNB)inAugust2009.2Chargedontheportionofsightdeposits
exceedingtheexemptionthreshold.3ShadedcorridorrepresentstheSNBtargetrangeforthethree-monthLiborrate.
Sources:BechandMalkhozov(2016)/Bloomberg;nationaldata.
14
Figure5–Repovolumessincetheintroductionofnegativerates
Source:SNB
Figure6–Swissbondyields
1.5
1
0.5
2016-04
2016-03
2016-02
2016-01
2015-12
2015-11
2015-10
2015-09
2015-08
2015-07
2015-06
2015-05
2015-04
2015-03
2015-02
2015-01
2014-12
2014-11
2014-10
2014-09
2014-08
2014-07
2014-06
2014-05
2014-04
2014-03
2014-02
-0.5
2014-01
0
-1
-1.5
CHFSwissConfederationbondissues- 1year
CHFSwissConfederationbondissues- 5years
CHFSwissConfederationbondissues- 10years
Source:SNB
15
Figure7-Yieldsonbondissues(8yearsmaturity)-Variousprivateborrowers
1.4
1.2
1
0.8
0.6
0.4
0.2
0
20
14-
-0.2 11
20
1412
20
1501
20
1502
20
1503
20
1504
20
1505
20
1506
20
1507
20
1508
20
1509
20
1510
20
1512
-0.4
Mortgagebondinstitutions
Commercialbanks(incl.cantonalbanks)
Manufacturing(incl.powerplants)andtrade
CHFbondissuesofforeignborrowers- AAA
Source:SNB
Figure8–Banklendingrates–Newloanagreements
2015-12
2015-11
2015-10
2015-09
2015-08
2015-07
2015-06
2015-05
2015-04
2015-03
2015-02
2015-01
2014-12
2014-11
2014-10
2014-09
2014-08
2014-07
2014-06
2014-05
2014-04
2014-03
2014-02
2014-01
2.4
2.2
2
1.8
1.6
1.4
1.2
1
Maturityofover1monthupto6months
Maturityofover6monthsupto1year
Maturityofover5yearsupto7years
Source:SNB
16
Figure9–Ratesoncommercialmortgagesandinvestmentloans
MortgagesandInvestmentloansrates
3
2.5
2
1.5
1
0.5
0
Fixedrate mortgages > 1to6mth
Fixedrate mortgages > 5to7yrs
Fixedrate mortgages > 10to15yrs
Variable rate mortgages (linkedtobasepoint)>5to7yrs
Fixedrate investment loans>1to6mth
Fixedrate investment loans>5to7yrs
Source:SNB
Figure10:Differentialpass-troughinSwitzerlandandDenmark
Switzerland
Denmark
1
Ratesonnewloans.2Ten-yearfixedmortgagerateminus10-yearinterestrateswap.3CopenhageninterestT/Naverage(CITA)swaprates
replacedCiborinDecember2012.
Sources:BechandMalkhozov(2016)/Bloomberg;nationaldata.
17
Figure11:SwissYieldCurve
18