Life Imitates Cartoons

It is standard practice for banks to lend money to the central banks (equivalent to RBI). In the current environment of Europe, banks don’t want to lend to customers and businesses because they consider that very risky. So they lend instead to the European Central Bank (ECB).

Not happy with this, the ECB reduced the interest they pay on such loans to be negative. Yes, negative. But what does that even mean? It means the banks have to pay the ECB interest to take their money! As this article said:
“The idea (is) that you can make not-lending so costly that lending starts up again.”
But no: turns out that the banks would rather hoard the cash than lend it!

Of course, hoarding doesn’t come for free either. It adds to storage costs, the cost of keeping all that money in giant, secure vaults. And transportation costs to move that money around. Additionally:
“Bank robbers, earthquakes and other unforeseen disasters, on the other hand, are a problem. Or rather, the delicate issue of finding an insurer willing to take on those risks while charging a reasonable fee.”

Ironically, the more the banks hoard, the cheaper would be the cost of doing so! Why?
“(That) point draws nearer as the business of sticking cash under the mattress gets standardised, with boilerplate insurance packages and economies of scale from new secure storage companies that offer to hold many banks' money for them in a single, cost-effective hollow mountain.”

Reminds me of Uncle Scrooge…

Comments

  1. Ramiah KumarAugust 19, 2016 at 6:28 PM

    Finance is not my cup of tea, so I was pretty much at sea. Nevertheless, something fascinated me in your argument, though I am not even sure what it is.

    Uncle Scrooge was a help. I love such cartoon figures; looks like at 70 I have not outgrown the fascination I first experienced when I first saw bits of Mickys and Donands in the Cinema hall, when I was 7 or so. (In the small Tamil Nadu town where I lived, the principal movie would be only in Tamil in those days. But during the interval time, these cartoon figures would appear for a few minutes, for what reason God and the theater owner only knew.)

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