Even central banks suffer from negative rates
The FT reports today that central banks also suffer from negative interest rates. It couldn’t be more ironic.
Investors ranging from small German savers to global life insurers have long complained about central banks’ use of negative interest rates.
Now, however, another group is feeling the pain from negative rates — central banks themselves.
European and Japanese rate cuts are putting pressure on many central banks’ returns — a source of income used to cover running costs and to provide finance ministries with profits on which they have come to rely.
A poll of reserve managers from 77 central banks, entrusted with reserves worth $6tn last August, found a clear majority were changing their portfolio management strategy as a result — including taking steps such as buying riskier assets.
Central banks are indeed big players on the market due to their OMO and related policies that involve purchasing and selling billions of assets in order to influence market prices, aggregate amount of high-powered money and interest rates. They also invest in other currencies and commodities and place cash with other central banks.
Unfortunately, a number of their placements are now generating negative returns and yields on their fixed income investments (often government bonds) are now very low, if not negative.
The irony of the whole situation is that central banks initiated their conventional and unconventional policies partly in order to help (i.e. force) the private sector to take more risks (‘search for yield’). What goes around comes around, and it is now central banks’ turn to follow the same route. In short, they are now turning into vulgar commercial banks that attempt to please their shareholders (i.e. budget-constrained governments who need this cash).
But in doing so, they also potentially endanger their capital base. While it isn’t clear whether or not central banks can fall into bankruptcy and what happens afterwards, I guess we’d all be better off not to reach a point from which we start asking this question.
PS: A French newspaper highlights the very close links between the French government and its domestic financial sector. Many government appointees were formerly financial executives, and many current executives used to work in government. This reminds me of this.
PPS: A few weeks ago, Huw van Steenis, bank analyst at Morgan Stanley, published a good article in the FT about the effects of negative rates on banks. His views are very similar to mine.