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The Strangest Banking Trend that No One Thought Could Happen, Is Happening

Janet Yellen in May 2015 (Photo: Flickr/International Monetary Fund)

For centuries, if you gave someone a loan, that money usually came with a cost. This cost, otherwise known as interest, whether formalized in legal documents, agreed to with a handshake, or enforced with an implicit or explicit threat, was one of the few constants in banking.

But for some of the world’s largest government banks, an idea that was dismissed as outlandish has recently become a strange reality: negative interest rates.

It’s exactly as it sounds—banks can now charge people for the privilege of holding their money.

This would seem to de-incentivize formerly desired behavior. Why would depositors continue to buy government bonds if it made more financial sense, on paper, to stuff it in their mattress? In 2009, however, Sweden became the first country in modern times to lower interest rates below zero, both to fight the 2008 financial crisis and to avoid a so-called liquidity trap, when money becomes trapped in government banks. Less than five years later, the European Central Bank, which administers monetary policy for the eurozone, also installed negative interest rates—currently at negative 0.3 percent. The Bank of Japan became the most recent government bank to do so, narrowly voting in January to adopt a negative 0.1 percent rate.

Government banks for years encouraged spending by lowering interest rates on government bonds and other investments, getting ever closer to zero and, in the process, steering depositors toward spending money instead of stashing it away. The influential British economist John Maynard Keynes predicted decades ago that government banks might someday consider negative interest rates to hasten this process, in part to help fight low inflation or deflation. But Keynes didn’t actually think it would happen, not expecting that anyone would pay banks to hold their money instead of withdrawing it as cash.

Yet, Sweden’s 2009 lowering of rates—seemingly without many of the negative consequences that some economists had predicted—paved the way for larger government banks to experiment with the approach. The European Central Bank lowered its rate twice more after initially going below zero in June 2014.

The phenomenon created ripples stateside even though negative interest rates remain a tough sell in the U.S. Investors felt the most immediate effects, as bank stocks in Europe took a dive after government banks went below zero. Consumers may see lower rates but negative interest rates doesn’t mean that, say, banks will suddenly give you money when you take out loans.  Retail banks probably won’t be charging consumer depositors to hold their money any time soon, lest they risk a bank run

Anything is possible, though. Their swift transformation from theoretical abstraction to real possibility seemed unlikely as soon as three years ago, when former Treasury Secretary Larry Summers floated the idea, only to be dismissed by many economists, who argued then that negative interest rates would unnecessarily spook investors.  

“It could affect confidence and be a challenge to the animal spirits,” Joseph LaVorgna, the chief economist for Deutsche Bank, told Bloomberg then.

Other commentators insisted that negative interest rates would likely never happen on American soil, because, as economics blogger Felix Salmon said, they were possibly “un-American.” (Salmon did allow for the possibility that it was more of a psychological problem than a real one. If you pay fees on your checking account, he pointed out, you’re likely already paying a negative interest rate in real terms, even if you don’t know it.)

American officials also expressed skepticism. Negative interest rates weren’t an idea they considered “very seriously,” Federal Reserve Chair Janet Yellen said in September 2015. (Some experts, meanwhile, questioned whether negative rates could potentially expose the Fed to legal risk, though the courts have generally given the Fed wide latitude in administering monetary policy.) 

Just last week, however, Yellen walked back previous statements that going below zero wasn’t much of a possibility. Yellen said that a chance of a recession in 2016 meant that the Fed would be considering every option for boosting the economy, including negative interest rates.

“I wouldn’t take those off the table,” she said.