Case Study : Negative interest rate.

Last week the Chairman of ECB, Mr Draghi has announced a negative interest rate(-0.1% annum to be exact) for banks that hold EUR account with them. This is definitely one of the weirdest policies that has been implemented in the banking world. Imagine you hold and account with a bank and say they give you like a shitty interest rate a year, 1.50% annum. Shitty rate, yeah but at the end of the year you will get 1.50% of your  savings right? With negative interest rate, you are the one that have to pay money to the bank for the privilege of saving money with them. In this case, the banks that hold account with ECB will have to pay 0.1% (annum rate) for overnight. So you don't to worry much about this because this is only between ECB and the banks that have account with them, and most importantly because I am sure many of you don't have a EUR account. But that doesn't mean you don't have to know about it. Knowledge is power and the same thing could have happened to Malaysia one day. you'll never know.

Some of you maybe be a bit unclear about what ECB is and what their function is. Well ECB is the federal reserve, the central bank of EUR currency. Similar to BNM(Bank Negara Malaysia), to process every single settlement in RM (EUR for ECB). To make explanation easy, refer the pic below

Imagine situation where I have to transfer RM100 to your account but I hold an account with a different bank from you. What happens when I told my bank (Bank C) to remit RM100 to your account in Bank M is that Bank C will tell BNM to debit RM100 to their account and credit RM100 to Bank M account. At the same time Bank C will tell Bank M that the RM100 is for you. And only then, you will see RM100 in your account. This settlement or remittance can only happen if : 
1. Both banks hold RM account with BNM 
2. Let's say one of them, Bank C doesn't have RM account with BNM, they must hold an RM account with another Bank that have RM account with BNM. Basically it is just another level of message where that other bank will transfer their money to Bank M.

Although that pic above is actually Settlement 101, I myself never knew about it till I joined banking. The reason I explained above is so that you can have a better picture of the ramification of this negative interest rate. If BNM(substitute of ECB) were to implement negative interest rate, that would means, every single day Bank C and Bank M will have to pay BNM if they cannot zerorize (flatten or whatever mumbo jumbo words those accountants use) their account. But worry not, Bank C or Bank M will not implement the negative interest rate on you or me because we already have gajillion reasons not to park money in a bank, negative interest rate is pretty much a deal breaker. currently most banks in Europe are offering 0% or near zero interest rate on the saving account. Damn I guess zero is still better than negative. 

So the message that ECB really wanna tell to the banks that hold EUR account with them through this new policy is, "I want you to get all the EUR you have out there, to the corporations, to the people, make them spend with it and generate economy." Pretty loud and clear. Of course with this negative rates, the lending rates also went down, to encourage people to borrow money from the bank. Pretty fancy move from the ECB, the first time in the history of modern banking to introduce a negative interest rate. US Federal reserve brought down the rate"near-zero" but never really went all the way to the negative zone.

It is kinda the recent 'in' thing with the Central Banks all over the world where they keep trying new fancy policy. The day Draghi announced about this new policy of his, few big media that I read mentioned that Draghi still have this one super power hidden weapon to beat deflation. The most potent weapon of all that he still keeps under his sleeve. Quantitative Easing. Fancy name right? I notice financial world likes to use fancy name for a stupidly easy stuff. I think it is one of a trick to sound more intelligent and make people easily amazed using fancy words. Quantitative Easing basically is printing money. See?? I wouldn't sound too intelligent if I simply say printing money. See?? I wouldn't sound too intelligent if I simply say printing money. Anyway, few years ago when Ben Bernanke of the US Federal Reserve announced QE, He didn't have many fans, and now medias describing QE as a "potent weapon". 

Though undeniably QE did help in many ways generating the US economy (not so much in Japan because corporations there are stingy as a retired old man). It's just that the World is super worry on how this policy is gonna fuck us up in the ass one day. We don't know how it's gonna fuck us up, we don't know when and how bad it will be, but knowing how economy works, it will fuck us up one day.