Comment on Central Bank of Japan's Negative Rate Decision

  • Nick Nicholls, Business Consulting Lead at GFT

  • 02.02.2016 08:00 am
  • undisclosed

“In light of today’s news about the move to negative rates by the Central Bank of Japan, it has been suggested that the BoJ is protecting banks from the effect of negative rates on holding deposits by providing a tiering of subsidy against central bank reserves. The suggestion being that the more cash that’s held centrally, the lower the rate will go.

“However, what hasn’t been mentioned is that the reason for those reserves being there in the first place is a consequence of liquidity and stress test regulations which are driven by the need to ensure that banks can meet liabilities as they fall due during a crisis. This increased requirement to hold more liquid assets was as a direct result of the 2008 financial crisis, following which the G20 nations led the way in trying to ensure such as crisis would never happen again.

“Banks don’t hold excess reserves; it’s too expensive. They hold enough to be compliant, and to meet their internal liquidity models.

“However, banks have issues within their infrastructure, which means they struggle to calculate accurately the optimal extent to which they need liquidity reserves. The position to support settlement of cash and securities as they fall due in a crisis is most likely overstated by most banks. Until these are addressed, reserves at the central banks will remain high.

“In the meantime customers’ short-term deposits continue to be driven away from banks, creating a risk transference; which sees more funds flow into not-so-well-regulated shadow banking sectors. We’re probably creating a new unregulated global loan position, without yet fully addressing the previous crisis.” 

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