In a news item on today’s BBCs website headlined “Natwest and RBS (Royal Bank of Scotland) may charge firms to hold deposits”, I read the following:
“When the (interest) rate goes below zero, the normal relationship between banks and customers is reversed. Instead of the lender getting paid interest by the bank for allowing it to use their money, the lender has to pay the bank for holding their money.”
I’m intrigued by the concept of negative interest rates. Imagine this:
Me (wearing a red-and-white horizontal striped shirt, black mask and green flat cap): Good morning Mr Bank Manager and how are you today?
MBM: Not so good. The interest rate went negative last night at 10 o’clock. That’s bad news.
Me: Oh, don’t you worry about that Mr Bank Manager. I’m here to cheer you up. I have a great pile of money in this bag marked swag and I want you to look after it for me.
MBM: That’s nice. Let’s take a look.
I open the bag and pour a collection of notes and coins onto the desk. MBM wets his fingers with the flecks of spittle already formed from licking his lips, rapidly sorts the money into orderly piles, and at lightning speed tots up the total.
MBM: Hmm, that £2,176.54 in all. A tidy sum. I’ll open an account in your name, credit the money to the account, and lock it all away in my time-lock burglar-proof safe.
Me: Thanks. That sounds fine. What interest will you pay me on my small fortune?
MBM: Interest? Ha! You didn’t listen to what I said earlier. We’re into negative interest rates, actually -0.32% as of today. That means you will have to pay me… (whips out calculator, does rapid calculation) … £6.96 after twelve months if the rate doesn’t change over that period. Shall we just call it £7, payable upfront, and be done with it?
Me: What! I thought the whole idea of a bank was that it was a place where I could loan you money for you to invest and that you’d pay me for the privilege. What’s gone wrong?
MBM: It’s all changed matey. These days I have to charge you for this privilege. Times are hard and the government wants us to spend our money to stimulate the economy. If you choose to stash it all away where it does nobody any good, we have to penalise you by charging you interest. Sorry my friend. That’s the way it is.
Me: Holy Moly and the Crackers! If I deposit my money with you and take the interest rate hit, what will you do with the money?
MBM: We either loan it out at punitive interest rates or we invest in the stock market. Either way, we make a pile of extra money from it. It’s a win-win for us bank chappies.
Me: Bloody hell. I might as well take my ill-gotten gains back to old Mrs Smith at Number 7 Acacia Drive and put it back where I found it last night while she slept peacefully in her bed.
MBM: Yes, you do that lad and, by the way, please give Mrs Smith my business card and ask her to come see me about placing her money in my safe where people like you cannot find it.
Me: Yeah, okay, I’ll do that. After all, we don’t want other unscrupulous people getting their grubby mitts on the money, do we? It’s better off with you. Say, why don’t I leave the money here, go round to see Mrs Smith, tell her where it is, say it’s in her name, and ask her for the £7 interest charge to save her the trouble of sending you a cheque? I might increase the amount a bit to cover my messenger services. Whaddya think?
MBM (gathering up the money in his arms): That’s a great idea. Off you go. I’ve got some dribbling and drooling to do.
So, in the end, we all win except poor old Mrs Smith but she doesn’t care. She’s too busy chasing down illusive Pokémon Go creatures. After all, what else can old folk do these days? Times are hard.