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Now here’s a lovely thing for Spud to misunderstand

He’s been telling us that the BoE should simply stop paying interest on central bank reserves. Because bastard banks basically.


A sizeable caucus of central bankers in the Eurosystem want to stanch widening losses at the national central banks by imposing large unremunerated required reserves against deposits. The losses reflect the negative interest margin on low-yielding bond portfolios financed by excess reserves on which the Eurosystem is paying 4 per cent.

The European Central Bank has already decided to cease remunerating the 1 per cent required reserves. With a base of €15tn of reservable deposits, that decision cost euro area banks the current ECB deposit rate of 4 per cent on required reserves of €150bn. In other words, the ECB clawed back a cool €6bn a year from banks. 

So large are central bank losses in the euro area that some are suggesting required reserves of 5-10 per cent — or even 15 per cent. Leading the charge is Paul De Grauwe, who holds the John Paulson Chair in European Political Economy at the London School of Economics (his magisterial book The Economics of Monetary Union is now in its 12th edition).

In September, the Bundesbank invited De Grauwe to give a lecture on “The role of central bank reserves in monetary policy.” He argued that the ECB could still control short-term rates after raising required reserves to 10 per cent of deposits or more by paying its deposit rate at the margin on excess reserves. 

What matters for London is, who pays for the unremunerated required reserves? 

Call these a tax. At a 4 per cent interest rate, a 10-15 per cent unremunerated required reserve is a tax on intermediation of 40 or 60 basis points. The tax can fall on bank shareholders, bank borrowers, or bank depositors, or some combination of them. 

OK – and who is that tax incident upon? Depositors. At least in an open currency system it is.

Aren’t we lucky that we’ve someone with no clue about tax or banking trying to design the taxation system for banking for us?

10 thoughts on “Now here’s a lovely thing for Spud to misunderstand”

  1. Spud reveals his fantasy life when arguing about cash in society.

    “all I have to do is imagine standing at the Despatch Box”

  2. Tim – I don’t follow the leap from
    The tax can fall on bank shareholders, bank borrowers, or bank depositors, or some combination of them.
    OK – and who is that tax incident upon? Depositors.

    Doesn’t the incidence depend upon the relative marginal elasticities of demand for deposit-taking and investing, including substitutes – such as a move to off-shore institutions or alternative investment vehicles?

    I suspect you are correct – at least that the incidence is largely on small / unsophisticated depositors. Wasn’t that the genesis of Eurodollars several decades ago – dollar investment without interference by the Fed ?

  3. @Sam Jones.

    I saw that. Hines is Spud’s accomplice at the partnership that blagged 10s of thousands in grants from some gullible charity. I guess that hand-made placard and asking his neighbours if they’d like a heatpump is what Hines has done to justify the grant.

    These grifters have no shame.

  4. Tying in this with Tim’s previous post, I can’t wait for Spud’s cashless electronic government money. When we’ve all agreed on what alternative token of value we’re going to use for our commerce, central banks will have tumbleweed blowing down their corridors. And governments totally cut of from revenue.
    Paradise! Can’t come too soon.

  5. Given how much effort is spent on dealing with forgery for physical cash I dread to think about what will happen with hackers and cyber-warfare

  6. That’s exactly what they analyse. Who did carry the cost of the Fed’s reserve insistences? And the example is the Eurodollar market, which didn’t have those – and depositors got higher rates. Controlled dollars paid loswer interest than free. Therefore, controlled sterling would pay less…..

  7. Sure – Eurodollars are the best example, and I’m not surprised to see that some of the costs of reserves are borne by depositors, and as I said, by the ones without the nous to go off-shore, or without the capital to make the effort worthwhile. I still think it’s too broad to say that depositors bear all of the cost – some may be borne by higher rates to borrowers, and some by shareholders. What was the Eurodollar / Domestic dollar spread, and did it take up ~100% of the cost of Fed deposits?

  8. Sorry, I didn’t make myself clear. That’s exactly the example that my source linked wanders through in order to try to make their determination. They’re using the Eurodollar spread to calculate what would happen without paying interest on central bank reserves.

  9. Bloke in the Fourth Reich

    Isn’t the sole point of a central bank of a fiat currency that they can make unlimited losses without becoming insolvent?

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