- Banks cannot be make money when lending at ZERO percent. Banks will NOT lend money at negative interest rates. They will lose money lending at negative interest rates. At NIRP, banks’ existing loan portfolios will be increasingly unprofitable. The business decision they will make as interest rates go increasingly NIRP is to contract existing loan portfolios and stop lending money. This will apply a contractionary pressure on the economy. It also means banks’ survivable is at stake. How will banks survive when their core lending business is bust? Can they continue gambling on the stock market, financial markets .. to make money? If lending grinds to a halt, why do we still banking institutions since they no longer play an economic role in the real economy. Why would anyone put money at a bank with negative interest rates and the threat of bail-in (bankruptcy)? Followed to its logical conclusion, NIRP implies global financial/banking system meltdown.
- This Is The NIRP “Doom Loop” That Threatens To Wipeout Banks And The Global Economy
by Tyler Durden, www.zerohedge.com
Remember the vicious cycle that threatened the entire European banking sector in 2012? It went something like this: over indebted sovereigns depended on domestic banks to buy their debt, but when yields on that debt spiked, the banks took a hit, inhibiting their ability to fund the sovereign, whose yields would then rise some more, further curtailing banks’ ability to help out, and so on and so forth.
Well don’t look now, but central bankers’ headlong plunge into NIRP-dom has created another “doom loop” whereby negative rates weaken banks whose profits are already crimped by the new regulatory regime, sharply lower revenue from trading, and billions in fines. Weak banks then pull back on lending, thus weakening the economy further and compelling policy makers to take rates even lower in a self-perpetuating death spiral. Meanwhile, bank stocks plunge raising questions about the entire sector’s viability and that, in turn, raises the specter of yet another financial market meltdown.
Below, find the diagram that illustrates this dynamic followed by a bit of color from WSJ: (top of post)