This post was written in 2015 but I decided to dust it off – most of it is relevant today.
As fixed income returns have been compressing, it has become harder and harder for banks for find investments which have no capital charge under Basel III and have a positive enough yield to cover the expenses a bank has with enough left over to pay the depositor. Receiving zero on deposits – which are unsecured loans – has become standard and one has to only look at Skatbank in Germany to find negative deposit rates i. They charge ¼% on deposits, other European banks are charging fees to “park money” and this trend is spreading, especially for larger, commercial accounts ii. Australia is taking it one step further – the government announced plans to tax deposits.iii
The concept that cash is, on a risk adjusted basis, a negative carry asset may be clearer if you think of bank deposits like renting a safety deposit box for a fee and putting money in it. In effect that’s what a bank deposit is except that the imaginary safe has a door in the back and the bank has the right to take the money out at will and invest it as it sees fit in risky assets so it can pay the deposit box fee. Ironically, a bank does everything but safe keep your money – it takes it and puts it at risk to earn a return. The risks are just not very visible to the average depositor but are real nevertheless.
As money in the form of cash can leave the banking system, cash is potentially destabilizing both to banks and to the banking system. So it is no surprise that HSBC is discontinuing safety deposit boxes.iv JPM Chase is starting to prohibit customers from storing cash in their safe deposit boxes as well.v
A more efficient way to limit the role of cash however is to legislate limits. France, a few days ago announced restrictions where French nationals will be limited to 1000 € cash per financial transaction.vi France is not unique in this, it is simply following in the footsteps of other nationsvii, viii. The stated reason for limiting the supply of cash is usually quite reasonable: fighting terrorism, tax evasion, drugs etc. but the side effect is that less and less money can leave the financial system even if it wanted to. This shifts the balance of power between financial institutions that can create money and individuals and businesses who can’t. Taking it a step further Willem Buiter of Citi Bank is the most recent economist to suggest that cash should be abolished completelyix, leaving no option but having to trust financial institutions to put depositor’s interests first.
Taking a slightly less monolithic view of cash, what if you have assets and obligations in multiple currencies? Nominal balances may be unchanged but the exchange value – purchasing power – changes on a daily basis and sometimes materially – look at the movements in the Euro vs. the USD for example. Voila, uncertainty!
Cash is already a small portion of the total amount of money in circulation and is that fraction becomes smaller the harder it becomes to insulate oneself from the financial system. The choice whether to accept the counterparty risk of banks effectively is taken away.
Ihttp://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11210057/Interest-rates-are-so-low-that-Germans-are-paying-to-keep-money-in-banks.html
iihttp://www.dw.de/commerzbank-imposes-penalty-on-big-depositors/a-18075214
iiihttp://www.abc.net.au/news/2015-03-28/federal-government-set-to-introduce-tax-on-bank-deposits/6355662
ivhttp://www.fxstreet.com/analysis/gold-investments-market-update/2015/03/24/
vhttp://www.economicpolicyjournal.com/2015/04/the-bankster-war-on-cash-jpmorganchase.html
vihttp://xpatnation.co/france-plans-to-fight-terrorism-by-restricting-cash-use/
viihttp://www.bloomberg.com/news/articles/2012-04-11/spain-to-limit-cash-transactions-to-fight-tax-fraud-correct-
viii http://www.bloomberg.com/bw/magazine/italys-cap-on-cash-payments-12082011.html
ixhttp://www.bloomberg.com/news/articles/2015-04-10/citi-economist-says-it-might-be-time-to-abolish-cash