ECB: Deposit Inflows Euro Area

The numbers for March 2016 are out and we see that deposits have been increasing, especially in France and Italy. So it seems that negative interest rates do not spur deposit flights, on the contrary, more people start saving money.

NIRP Deposit Flight?

The new numbers are in on bank deposits for February 2016 and instead of a deposit flight we see a deposit embracement. Notable up movers are Germany, France, The Netherlands and Italy. People do like negative interest rates it seems.

ECB cuts interest rates: No bank deposit flights yet

The ECB cut interest rates to -0.04%.

 

This is a real problem for banks as their profit margins get squeezed. Banks will not gain a lot of money when they can't lend at normal rates. On top of that, some European countries like Belgium have a minimum deposit interest rate that needs to be paid to customers like us (0.11%). So banks get less money from loans but still need to pay depositors 0.11% interest.

Another problem is that depositors will think: "Hmm I can't earn any money on my deposits, so I'll take the cash out of the bank." And if we ultimately see negative deposit rates, people will certainly take their cash out of the banks.

That's why it's very important to see what the deposits are doing.

I created a chart of the deposits of Euro Area Residents, to be found here.

I had expected that when the ECB cut interest rates below zero since 2014, that we would see a deposit flight happening. But we actually see more deposits on the banks. Very counterintuitive and needs to be monitored in the next months.

Equation for Interest Rate Vs. Savings Rate

It seems like Japanese, Swiss, European people are saving more when we have negative interest rate policy. Why are people saving money when their money yields nothing?

The fact is that the higher the interest rate, the more you save as it gives nice returns on the bank. But when the interest rate hits 0%, weird things happen. Suddenly people start to save more due to uncertainty (in physical cash of course). No normal person will buy stocks because banks will collapse as they see their deposits go up in smoke. No normal person will buy bonds at negative interest. And no person will leave their cash in the bank. See chart below.

This is how I see the equation.