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Given that the current ECB reserve rates are negative (-0.5%), I suspect that if I deposit 100k€ into a EU commercial bank, that bank must in turn deposit my money at the ECB and pay 500€/year to ECB (negative interests).

Is that correct? How does the mechanism work?

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  • $\begingroup$ How do you deposit it? Cash, or bank transfer? If it's a bank transfer... they can receive 100k€ at the ECB and now they want to get rid of it so they don't have to pay interest. $\endgroup$ – user253751 Aug 11 '20 at 13:17
  • $\begingroup$ Yes bank transfer ! Thanks for the quick explanation $\endgroup$ – elemolotiv Aug 11 '20 at 18:08
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Banks do not make matching deposits into central banks, other than in a hypothetical 100% reserve system. As such, the answer is “no”.

What happens is that the private bank has a liquidity inflow, and it would need to find a corresponding asset, normally a money market instrument. The yield on that instrument is likely negative, but the “negative interest” is flowing to the seller of the instrument.

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  • $\begingroup$ thank you Brian! the logic is yet not fully clear to me. I understand the bank must keep an asset to counter-balance the liability of my deposit. But why must the bank bother to keep a money market instrument with negative yields in its assets. Can't the bank just keep the money I deposited as an asset and avoid to suffer negative yields? $\endgroup$ – elemolotiv Aug 10 '20 at 15:50
  • $\begingroup$ You make a habit of depositing 100,000 euros worth of banknotes? That would raise the eyebrows of many regulators. In practice, most deposits are transfers from another bank, which creates a settlement balance at the central bank - which has a negative interest rate. $\endgroup$ – Brian Romanchuk Aug 10 '20 at 16:16
  • $\begingroup$ no cash briefcases! 😀 in my example I would transfer the money from another bank. So OK you are saying there would be a settlement balance at the ECB, to which a -0.5% interest rate would be applied. That answers my initial question. But then, why did you mention the money market at all, if the process can work without money market funds? -- sorry I might look stubborn, I just want to understand the process inside-out 🙇‍♂️ $\endgroup$ – elemolotiv Aug 10 '20 at 17:38
  • $\begingroup$ The bank would likely buy a money market instrument with the settlement balance. $\endgroup$ – Brian Romanchuk Aug 10 '20 at 20:30

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