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Updated 22:58 23/10/20

Banks prepare to hoard cash as rates go negative

By Duncan Richardson, News Editor

18 Aug 2016

Stockpiling billions of pounds’ worth of bank notes may sound like a plot form an old movie, but some financial institutions and insurers are contemplating the idea as central banks start charging them to deposit cash

Europe’s motorways are not yet jammed with armoured vans transporting bank notes to secure locations, but should it be more economical to do so the practice could become common place.

Following the ECB’s rate cut in March, banks are now paying an annual levy of 0.4% on funds held at anyone of the Eurozone’s 19 central banks. The policy has cost banks an estimated 2.64 billion euros since rates first went negative in 2014.

Negative rates are supposed to encourage business to spend and invest, however, vaulting physical bank notes will give business and banks the option of holding cash without the cost.

Germany’s second largest lender Commerzbank is considering the idea, but when a Swiss pension fund attempted to withdraw a huge sum of money the bank refused the request, according to local sources.

Latest figures in the UK indicate the amount of money being held outside the baking system is rising at its fastest rate since the 2008. The amount of bank notes held outside the financial system has increased by £1.2 billion since May and by £5.9 billion in the last 12 months.

In countries where rates are already negative the number of customers holding cash at home has risen sharply. In a fractional-reserve banking system where banks only keep a small percentage of their assets in cash, a bank run could be just around the corner.

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