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The Bavarian Savings Bank Association and large-denomination banknotes

The European Central Bank (ECB) interest rate for bank deposits is currently minus 0.3% and economic theory would predict that at a minus rate, depositors (and this includes companies as well as banks and individuals) would prefer to hold cash rather than pay the central bank to look after their money for them. It has to be said that this doesn’t appear to have happened on a large scale yet, but clearly one of the reasons why economists are interested in getting rid of cash is in order to allow the interest rates to go further into negative territory in order to stimulate economic activity over hoarding. Now, it clearly costs something to manage cash over and above the cost of managing an electronic deposit hence it is interesting to speculate what the crossover rate might be, the modern version of the old “specie point” at which it was cheaper to hold bullion for monetary purposes rather than paper instruments.

In Germany, this calculation is being made. The Bavarian Savings Bank Association sent around a circular to their members setting out their version of the calculation. On this basis, the crossover rate is actually about half of the current negative rate: we’ve already crossed the crossover point.

With 1.50 euros plus insurance tax for 1000 Euro, the value would be at 0.1785 percent, below the ECB's deposit penalty rate of 0.3 percent, it said. Additional costs for CIT or additional burglary protection are not taken into account.

From Penalty interest: Unions want money rather stash in the vault - SPIEGEL ONLINE

 This isn’t really a serious calculation because, as it says at the end, it doesn’t take into account the significant costs of cash in transit (CIT) or the additional security expenditure that would be needed to guard cash hoards. But it does make a fun point, at least to me, which is that the existence of the €500 notes has an impact on that crossover rate. Clearly, if the maximum denomination banknote in Europe was (as it should be) €50 then you will need 10 times as many of them to create a horde of the same value and that means higher costs for storage and transport. Now that the ECB has decided stop printing the 500s, banks would have to store masses of 200s, so the cost of storage and transport will be even higher.

Nevertheless, the calculation does make an interesting point, which is that we appear to past the crossover point already, yet no banks have to date decided to store their squillions under the mattress rather than leave them on deposit. Oh, wait…

Commerzbank, one of Germany's biggest lenders, is examining the possibility of hoarding billions of euro in vaults rather than paying a penalty charge for parking it with the European Central Bank, according to sources familiar with the matter.

From RTÉ Mobile - Commerzbank may hoard cash to avoid ECB charges

Why on Earth would they want to do this? Does it really make any sense?

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