Europe: Who benefits from negative rates?
If the reversal rate is lower elsewhere, Italy and Germany can’t blame the ECB.
It is too easy to suspect that the wider politicization of monetary policy in Europe influences some bankers’ attacks on negative rates – in addition to their own self-interest – and particularly in Germany.
In fact, monetary easing hasn’t just lowered the southern states’ borrowing costs, it has also helped prop up Germany’s manufacturing sector through a lower exchange rate.
However, there is a valid question – understandably glossed over by much of the European Central Bank’s research – about how the effectiveness of negative rates varies not just between banks but also between countries. Could negative rates be working in Italy, but not in Germany, or vice versa?
Markus Brunnermeier is the Princeton University professor best known for modelling the so-called reversal rate of interest, at which monetary policy is so negative it becomes counter-productive by curtailing credit supply and making it more expensive.
According to his research, the reversal rate will be lower if banks have stronger capital levels, if their maturity mismatches are bigger, and if their common inability to pass on negative rates to most retail depositors is less important.
In other words, if the banks depend more on wholesale funding and the economy relies more on capital markets.