Could Negative Interest Rates lead to a Bank Run?

In a word, yes. There is something new in the global financial system that could cause the mother of all bank runs…negative interest rates.

Thanks to aggressive central bank attempts to stimulate the economy, nearly 40% of the world’s sovereign debt, about $8 trillion dollars, now trades at negative rates. This means quite literally that you have to pay to park your money in these securities, most of which are issued by European countries or the Japanese. The European Central Bank also charges interest to store the deposits of commercial banks. In Switzerland, the commercial banks charge their depositors to keep their money on deposit. This is not theory, dear reader, it is happening now.

The next step is governments ordering banks to tax your bank account with negative interest rates to try to force you to spend. You will have to pay to keep your money in the bank. So, of course, you won’t. But rather than spend it, I’m guessing many of us will become our own bank…take out cash and buy a safe to store it in. Would you be surprised to learn that sales of safes are at record levels in Europe and Japan? But not in the U.S. of A., you say. Well, Janet Yellen, head of the Federal Reserve, recently said negative interest rates aren’t “off the table” in the U.S. either.

The problem is that there is not enough physical currency to cover even 15% of the money held in bank deposits. Here’s the chart courtesy of Casey Research.

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Recently, we reported on the actions of Munich Re, one of the largest reinsurance companies in the world, overseeing €231 billion in investments. The German company confirmed that negative rates are making physical cash a more valuable holding. Munich Re says it will store at least 10 million euros “so we won’t have to pay for the right to access the money at short notice”, CEO Nikolaus von Bomhard said at a March 16, 2016 press conference. “We will also observe what others are doing to avoid paying negative interest rates,” he said.

If large conservative institutions such as Munich Re are increasing their holdings of cash, shouldn’t you, dear reader? Or would you rather wait until there is none to be had?