Questions on negative rates keep coming in: Where does the money go? Who benefits? Will the Fed do the same? What’s Draghi up to?

A quick refresher course on paying interest on excess reserves vs. charging interest on excess reserves is in order.

Q: Who has negative rates?
A: The European Central Bank (ECB), Sveriges Riksbank in Sweden, the Swiss National Bank (SNB), the Bank of Japan (BoJ), and Denmark’s Danmarks Nationalbank (DN) all have negative rates.

Q: Negative rates on what?
A: The above five countries have negative rates on “excess reserves”. Switzerland also has negative rates on deposits. Most banks are reluctant to put negative rates on deposits fearing bank runs and currency hoarding.

Q: How much are we talking about?
A: Bloomberg Quick Take notes “more than $7 trillion of government bonds worldwide offer yields below zero.”

Q: How do excess reserves come into play?
A: Central banks create them through monetary actions like repos and QE hoping to get credit flowing.

Think of it this way: money is printed into existence even though there are no creditworthy borrowers who want loans.

The irony is banks cannot lend excess reserves. Money lent by one bank will simply appear as excess reserves when the money is deposited elsewhere. Mathematically, someone has to hold every cent of money created by central banks.

Q: Who collects the money?
A: If the central bank charges money on excess reserves, the central bank collects the money. In general, bondholders pay money to hold bonds with negative rates. Borrowers get paid to borrow. Yes, this is absurd.

Q: Who benefits from low and negative rates?
A: Asset holders benefit from cheap money, at least initially. Asset prices went through the roof when ECB president Mario Draghi issued his famous “Whatever it Takes” speech on July 26, 2012. Various rounds of QE by the Fed also sent the stock market higher. The obvious consequence is easy to explain: asset bubbles break, leaving banks and borrowers in worse shape.