uThis also existed among private individuals, but it was quickly considered a bit bizarre: in the days of negative interest rates, one way of avoiding such interest on savings from the banks was simply to pay large amounts of Cash kept at home. In surveys, 36 percent of Germans said that if their bank were to introduce negative interest rates, they would withdraw their money from their account and keep it in cash in a safe deposit box or at home. In the end, not that many did it, as later surveys showed. Maybe people were too scared after all or balked at the expense of a safe - but the will was there.
The German banks, on the other hand, apparently stored large amounts of cash. Those whom some savers tried to trick with their cash hoarding became the biggest cash hoarders themselves. There had been certain signs of this for a long time: the money transport companies, for example, had hinted at something like this. And some financial managers, but above all from the insurance industry like the former Munich Re boss Nicholas von Bomhardhad described the hoarding of gold and cash in times of negative interest rates as a rational strategy for companies as well.
51 billion euros in notes and coins
A study by Deutsche Bank now shows the extent to which German banks in particular had expanded their cash holdings. It is about a quite remarkable evasive strategy of the banks against the unconventional monetary policy European Central Bank (ECB).
It started with negative interest rates in 2014. The ECB President at the time Mario Draghi had introduced negative interest rates for bank deposits at the central bank – with the note that these interest rates were “for the banks, not for the people”. However, this did not stop the banks from gradually introducing negative interest rates for their customers as well. 582 banks did this at times.
The banks' cash hoarding is said to have started later, according to the study. Namely, when the ECB's deposit rate was lowered further into negative territory in March 2016, to minus 0.4 percent. Initially it was only minus 0.1 percent, later minus 0.2, then minus 0.3 percent. With minus 0.4 percent, however, a threshold was apparently reached from which holding large amounts of cash became more attractive for banks. In September 2019, the interest rate was cut even further into negative territory, to minus 0.5 percent. That was the low point.
According to the study, the stocks of banknotes and coins held by German banks have roughly tripled in the six years since 2016, from 17 to around 51 billion euros. The interesting thing about it: The whole thing was obviously a special feature of the German financial system. At the banks in the rest of the euro area, the increase in cash holdings in the same period was only 11 billion euros, which was an increase of 30 percent.
Similar to Germany, it was only in neighboring Austria, the study goes on to say: there, too, the cash holdings of the banks had increased many times over during the negative interest phase.
“Since 2018, the German institutions have held about half the cash holdings of all euro area banks,” writes study author Heike Mai from the research department of the German bank: "Measured in terms of total assets, however, Germany's share of the banking market in the euro area is only a quarter." The hoarding of cash at banks in Germany was once again disproportionate to the importance of its banking system within Europe.
The most recent development of the numbers shows that it was not just a matter of a completely normal increase in the amounts over time. The development has reversed itself: In July of this year, the ECB finally raised the interest rate for bank deposits at the central bank from minus 0.5 to 0 percent in its first interest rate hike in eleven years.
With the turnaround in interest rates, cash holdings are falling
And the banks responded by not only abolishing their negative interest rates for customers in most (but six persistent cases) - they also reduced their own cash balances again. "By the end of the same month, the banks in Germany had reduced their cash holdings of banknotes and coins by a record-breaking 11 billion euros," says the study.
In the meantime, the ECB decided last week to raise the deposit rate further, from 0 to 0.75 percent. So now the banks can get money for their deposits at the ECB, while until recently they had to pay. The author of the study, Mai, expects that this will further reduce the banks' cash holdings: "There is much to suggest that the banks will continue to reduce their interest-free cash holdings."
And again, as with the build-up of cash balances, there is a clear difference between Germany and the rest of Europe: "Bank cash balances in the rest of Europe hardly reacted to the interest rate change in July," says the study.
While the development of bank cash balances has been clearly documented, it remains a matter of conjecture as to why the phenomenon occurs almost exclusively in Germany. Mai quickly clears up two possibilities. The Germans' love of cash is not the reason. Although Germans pay more in cash than people in other countries, cash payments have not increased. And the high overall liquidity of the German banks cannot be the main reason either. After all, French banks also had a lot of liquidity. An interesting assumption is therefore expressed in the study: It is possible that Germany's banks stashed away a particularly large amount of cash during the negative interest period because they had large safes at their disposal. Then they would have met exactly the requirement for avoiding negative interest that so many citizens lacked.