Macro Perspectives Final

Macro Perspectives Research IN SEARCH OF YIELDS

STATUS OF CONTINUED UNCONVENTIONAL MONETARY POLICY TOOLS

Series Abstract Status of Continued Unconventional Monetary Policy Tools A little over a decade has passed since the 2008 global Central Banks tasked with balancing economic progress and financial crisis, and central banks continue to apply stability are adopting increasingly unconventional monetary unconventional monetary policy tools in their effort to policy tools in their effort to right the ship since the 2008 maintain economic stability amid slowing growth. Global Financial Crisis. Quantitative easing (QE) alongside a now all-too-common While the most widely used tool has been quantitative negative interest rate offered by key central banks is easing — a method of injecting liquidity directly into the beginning to highlight the possibility that depositors may economy — major Central Banks from Japan to Denmark end up footing the bill as banks find their earnings squeezed have had to resort to ‘offering’ negative interest in the view from longer than expected low rate environments. that low rates will entice private lending and increase Even the most counter-intuitive benefits, the likes of economic activity with the everlasting hope of achieving negative-interest rates on mortgages, might not swing their 2% inflation target. enough demand to offset soaring fixed-asset prices against These actions have at least had some effect with stock stagnant wages. market and fixed-asset prices at all-time-highs. Cyclical recession fears are on the rise, and the US But new challenges have come home to roost within the administration’s deregulation plans are paving the way for heart of the financial sector. Commercial banks are facing major banks and money market makers to eye risky fierce headwinds against their traditional business-models investments, akin to assets held in 2008, in search of better from tech and FinTech disruptors, negative rates, low-yield yields. environments, strict regulatory oversight and depressed Gold has made its return to the stage, but millennials borrowing appetite. overtaking the global ageing workforce might seek different First Open Front: Negative Interest Rates investment opportunities, having become accustomed to The European Central Bank (ECB), the Bank of Japan (BoJ) tech, not tradition — apps, not advisors. and Denmark’s National Bank continue setting the stage for Meanwhile, cash restrictions, capital controls, suffocating record negative interest rates following Berlin’s latest AML oversight demands, bail-in prospects and low deposit decision to further push rates in decline to new lows (see guarantees, put households and larger depositors in riskier Figure 1). positions. This is a result of increasing vulnerability among banks as revenues and profits take significant hits in the Central Bank Negative Interest Rates Have Taken

never-ending cycle of excess liquidity charges. Fig. 1 Hold Over Several Major Economies In the following series we will unpack the effects of these 0.0 Central Bank policies on the global ﬁnancial system.

-0.2 Part 1. Series Abstract and Status of Continued Unconventional Monetary Policy Tools -0.4

Part 2. -0.6 Wealth Storage Options and Associated Risks -0.8 Switzerland Denmark ECB Sweden Japan Part 3. Sources: Swiss National Bank, Danmarks Nationalbank, European Central Sovereign Debt and Negative Yields Bank, Sveriges Riksbank, Bank of Japan (October 2019). Denmark — who was the ﬁrst major economy in the world to start offering negative interest rates in 2012 — was recently Part 4. forced to increase charges on excess reserves yet again in Traditional Banking Facing Disruption order to maintain its Krone peg close to the Euro after the ECB lowered its interest rates even further.

STATUS OF CONTINUED UNCONVENTIONAL MONETARY POLICY TOOLS

While the United States Federal Reserve has not yet Revenues Down, Profits Down ventured into negative interest rates and probably remains Cracks are already beginning to show across the board. 1H19 unlikely to do so in the near-term — despite recent calls by revenues for major US and European investment banks are US President Donald Trump — the phenomenon has become down 11% versus the same period in 2018, the slowest half the norm for over half a decade in some of the largest global since just before the global recession according to data by economies (see Table 1). S&P Global Coalition.(4) Revenues mark a 13-year low. Danish banks for 1H19 have seen their profits fall 20% in Half of Top 10 Global Economies Face Banking comparison to last year according to banking association Pressures From Neg. Rates Tab. 1 Finans Danmark (5). The decline comes off a 2017 peak, but Country Notes Rate continuing low interest rates and subdued demand for loans have pushed profits for 17 banks down by 36% in 2 years. USA Healthy Outlook + China ‘Trade War' with US + Ulrik Nødgaard, Finans Danmark CEO, said that “we are in a Japan Banks Highly Exposed to Foreign Bonds & Stocks - situation where the Dane’s demand for new loans is only Germany Economy Contracted, Recession Fears - slightly increasing, even though we are six years into an UK Brexit Uncertainty - economic recovery … demand for new loans remains India Interest Rates Hit 9-Year Low + restrained.”(5) The cautious tone comes amid the first France Healthy Outlook, Outpaces Germany - negative interest rate mortgage being offered in Denmark Italy Unstable Government - just last month at -0.5%. Brazil Heavy Forex Intervention, Record Low Rates + Canada Stable Outlook + And there is no end in sight to the spiral that has, for all intent and purposes, done the opposite of its primary Sources: Federal Reserve, Bank of China, Bank of Japan, Deutsche intention in assisting economic activity through lenders. Bundesbank, Bank of England, Reserve Bank of India, Bank of France, Bank of Italy, Central Bank of Brazil, Bank of Canada (October 2019) Banks are now finding themselves between a rock and a hard place having to make bold decisions on either charging “That [negative interest rates] have simultaneously their clients on their deposits and risk them leaving, or bear appeared in several European countries at a time when the brunt of excess reserve charges, further squeezing global financial markets are not in crisis is unprecedented” profitability. was the position of the World Bank in 2015.(1) Nearly 5 years The irony is not lost on anyone that banks are now charging on, negative interest rates have become the expected norm a rate on wealthy depositors who, in effect, are loaning in what is financially speaking the largest expansion period funds to financial institutions. The cherry on top is the risk in recorded world history. taken on by depositors as fund safety in bank failure Tomayto Tomahto? scenarios can result in devastating losses, with lukewarm deposit guarantee as their only protection (see Table 2). Although European/US spillover-risks from unconventional XXX monetary policies are limited according to a recent study by Deposit Guarantees in the Case of Bank Failures / the Federal Reserve,(2) any crisis sparked from a now

Tab. 2 Bail-Ins squeezed European banking sector could very well once again cause global contagion. CountryTHE LEGEND Insured(cont.) Currency USD (Approx) Intertwined global markets are being affected by low USA 250,000 USD 250,000 yielding bonds and investors are either hoarding cash — as is Norway 2,000,000 NOK 230,000 the case in Europe — or venturing into riskier investments. Australia 250,000 AUD 175,000 According to Bank for International Settlements (BIS), Japan UK 85,000 GBP 110,000 has now had to expose itself to record high investments in EU 100,000 EUR 110,000 foreign assets for the ﬁrst time following zero rates, Switzerland 100,000 CHF 100,000 negative rates and continued stimulus (3). It now warns Canada 100,000 CAD 75,000 that Tokyo is vulnerable to currency swings and external Hong Kong 500,000 HKD 60,000 shocks, threatening ﬁnancial stability in the world’s third Malaysia 250,000 RM 60,000 largest economy. Sources: Federal Reserve, Norges Bank, Reserve Bank of Australia, Bank of England, European Central Bank, Swiss National Bank, Bank of Canada, Hong Kong Monetary Authority, Bank Negara Malaysia (October 2019)

STATUS OF CONTINUED UNCONVENTIONAL MONETARY POLICY TOOLS

Swiss banks were the ﬁrst to kick off what, for client European Union Employment Levels at All-Time- retention, remains a rather risky practice. UBS now charges

Fig. 2 Highs (Ages 20-65) its depositors with over EUR 0.5m 0.6%, while Credit Suisse takes 0.4% on accounts holding more than EUR 1m. 74 73.2 Swiss account holders aren’t the only depositors who are being levied. The very same Danish Bank, Jyske Bank, that 72.2 72 now offers negative-interest rate mortgages, has also had 71.1 its arm twisted in applying a -0.5% rate on deposits over 70.2 70.1 DKK 7.5m (approx. EUR 1m). Sydbank, one of Denmarks 69.8 70 largest financial institutions has announced the same. 69.2 68.8 68.9 68.6 Even in Japan — where the prospect has been on the table 68.5 68.468.4 for a decade — signs are beginning to point towards a break 67.8 68 67.3 67 away from the taboo of bank charges on depositors. Hiroshi 66.8 Nakaso, Deputy Governor of the Bank of Japan, said that “the social norm in Japan is something along the lines of 66 ‘there is no way that fees are charged on hard-earned 2002 2004 2006 2008 2010 2012 2014 2016 2018 money deposited in a bank.’ But I think the time has come Source: Eurostat for the Japanese people to discuss fair compensation for financial intermediation services."(6) No Option Without Risk And while the rest of Europe remains reluctant to take While US banks remain solid on the back of strong economic policy, cross-border effects from Europe and Japan, along measures which pass through the negative interest rate to with the US/China trade war have sparked fears of a soon- depositors, it also leads to the erosion of profits led by to-come global recession. narrowing bank net interest margins. In effect, the sustainability and health of banks are being put on the The safety and health of these banks, while still in the green, are facing challenges to their traditional business ropes once again. models. Bail-in procedures have become law. One Way or the Other... More monetary tools are still in play, and the likelihood of While bank failure stopgaps since the global recession have further expansion of cash-limits adopted worldwide will be been implemented, the mechanisms remain untested. And key to even more control over macroeconomic policies by raising bail-in debt to meet Central Bank reserve regulators. requirements might bring banks even closer to the edge as Such concerns have already marked the return of investors it cuts even further into their profitability. to gold markets, or moved new funds into Bitcoin which has UBS puts the number at 450Bn Euros that EU banks will now established itself as an institutional store-of-value given the availability for trading from the Nasdaq to futures need to raise this year alone in order to meet the minimum on the Chicago Mercantile Exchange (CME). requirements.(7) This is likely to continue growing as bank assets balloon to numbers larger than before, now even The next part of this series of Macro Perspectives by CoinShares will unravel the Wealth Storage Options and bigger than the “too big to fail” mantra of 2008. AssociatedTHE LEGEND Risks. (cont.) Employment Up, Savings Up Eurostat places the European Area employment rate to Deposits: Banking Risk have hit an all-time-high for ages 20 through 64 (see Figure 2). However, the job recovery isn’t all that it seems as wages Cash: Inflation and Transactional Risks have remained stagnant across the EU, limiting spending on fixed-assets whose appreciation have ballooned to levels Hard Assets: Liquidity Risks even the ‘cheapest’ money can't buy. And depositors aren’t giving banks much reprieve either. Markets: Valuation Risks According to Eurostat, higher savings rates are adding fuel to the fire of now costly bank deposits. (8) Gold, Bitcoin and Metals: Return and Volatility Risks

STATUS OF CONTINUED UNCONVENTIONAL MONETARY POLICY TOOLS

Works Cited

1. World Bank Group. Global Economic Prospects: The Global Economy in Transition. [June] Washington : s.n., 2015. 2. Curcuru, Stephanie E, et al. International Spillovers of Monetary Policy: Conventional Policy vs. Quantitative Easing. August 2, 2018. 3. The Economist. Japanese banks’ foreign exposure may threaten financial stability. [Online] July 26, 2018. https://www.economist.com/ finance-and-economics/2018/07/26/japanese-banks-foreign-exposure-may-threaten-financial-stability. 4. Morris, Stephen and Noonan, Laura. Financial Times. Investment banking revenues plunge to 13-year low. [Online] September 5, 2019. https://www.ft.com/content/3074d05c-cf28-11e9-99a4-b5ded7a7fe3f. 5. Brink, Carsten. Finans Danmark. Bankernes overskud faldt 20 pct. i første halvår. [Online] September 16, 2019. https://finansdanmark.dk/ nyheder/2019/bankernes-overskud-faldt-20-pct-i-foerste-halvaar/. 6. Nakaso, Hiroshi. Bank of Japan. New Frontier of Macroprudential Policy: Addressing Financial Institutions' Low Profitability and Intensified Competition. [Online] November 29, 2017. https://www.boj.or.jp/en/announcements/press/koen_2017/data/ko171129a1.pdf. 7. Crow, David. Financial Times. Banks come up against tough market for bail-in debt. [Online] March 25, 2019. https://www.ft.com/content/ 14e3c77a-3505-11e9-9be1-7dc6e2dfa65e. 8. Eurostat. Household saving rate nearly stable at 12.3% in the euro area. [Online] April 4, 2019. https://ec.europa.eu/eurostat/documents/ 2995521/9711686/2-04042019-AP-EN.pdf/eed62059-6be4-4dfb-b074-8a6d78a3c19d.

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