In The New Frontier of Negative Rates and Banking, business expert witness Douglas E. Johnston writes:
How Are Other Financial Institutions Responding to Ultra Low and Negative Rates?
Eurofi, a European-based think tank chaired by former IMF Director Jacques de Larosiere which carries the support of ECB President Mario Draghi, has the stated goal of ‘fostering growth in a highly indebted EU environment.’ In remarks prepared for the April 23-25 Eurofi High-Level Seminar and delivered on behalf of the Basel-based Bank for International Settlements (often known as the central banks’ central bank), 20-year BIS veteran and Deputy General Manager Herve Hannoun recently addressed the growing phenomenon of negative interest rates among a ‘Who’s Who’ of central bankers, international banks, insurance companies, financial market makers, rating agencies and regulators. Eurofi’s many activities have included the pursuit of a possible new Capital Markets Union (CMU) under the recent leadership of Lord Hill of London. Among its initiatives, Eurofi is addressing the technological and regulatory framework for new growth-oriented lending and capital market mechanisms across Europe. Given the recent emergence of crowd-funding, P2P (Peer-to-Peer) financial activities, and promising new technology and delivery platforms, one possibility before Eurofi is to reconsider the traditional role of how commercial banks have functioned as intermediaries between depositors and business borrowers. With negative rates, the linkage between expanded business lending activity, increased monetary velocity and broad economic growth now appears clearly to be a higher priority for European central banks and regulators.
As the BIS’ Hannoun noted in his published remarks, “An experiment is under way in continental Europe to test the ‘boundaries of the unthinkable’ in monetary policy…The main aim of an ultra-low interest rate policy is to deter saving and encourage borrowing.” Interested US-based banks and institutions were amply represented at the Eurofi Seminar, and they will no doubt give due consideration to growth mandates and possible banking developments on this side of the Atlantic as well. As noted, the full implications of negative rates are still unfolding. For the present, one result may be that banks do more than ever before to enhance economic growth. Institutions, private investors and those interested in alternative investments around the world will be following this story, and to assess where to invest. As NYT best-selling economist and author Jim Rickards has recently noted, “in a world of negative interest rates, gold (becomes) a ‘high yield’ asset.” An environment of negative interest rates, if it continues, seems likely to produce other emerging issues.
Doug Johnston (through Five Management, LLC) is an expert witness in banking/lending and an investigative business consultant specializing in Commercial Banking & Lending, Private Equity, and International Banking.