The Negative Rate Mortgage Is Now A Reality

With negative interest rate policy (NIRP) raging in the eurozone and over €1.9 trillion in European government bonds trading with negative yields, many were wondering whether this generosity will spill over to other debtors.

Following consecutive rate cuts during this year by the Danish Central Bank, local Danish banks — Nordea Credit, Realkredit Danmark — are now offering a mortgage with a negative interest rate! Negative interest rates aren’t a new phenomenon in Europe, but they’ve been limited to inter-bank borrowing. FT reported Ms Christiansen received a negative interest rate for her three-year loan, meaning the lender — Realkredit Danmark, a part of Danske Bank — is paying for her to borrow money. The interest rate of minus 0.0172 per cent — which equates to her receiving about DKr 7 each month from the bank — is just one sign of the “Through The Looking Glass” effects of extreme central banking measures in Scandinavia.

The Scandinavian central banks are going pretty far in NIRP. Sweden’s Riksbank became the first central bank in the world to take its main policy rate — the so-called repo rate — into negative territory. Denmark’s Nationalbanken in turn cut its deposit rate — the amount it pays or in this case charges banks for placing money with it — four times at the start of this year to a world record low of minus 0.75 percent.

On April 8th, Switzerland became the first country to sell 10-year bonds with a negative yield as quantitative easing and deflation fears pushed up bond prices.  Until Wednesday, no country had ever sold 10-year debt that gives investors a yield of below 10 percent. Sold at a yield of minus 0.055 percent, investors bought 232.51 million Swiss francs of debt, maturing in 2025, at a price that could mean they end up paying Switzerland’s government to hold their money. The Swiss deposit rate is set at minus three-fourth of a percent currently so the new Swiss 10-years are at least theoretically more attractive than that. Swiss National Bank (SNB) also held its target range for the three-month London interbank offered rate (Libor) at minus 1.25 percent to minus 0.25 percent. SNB uses Libor as a reference for steering its money-market rates, which influence rates on bank lending and mortgages.

There is concern for what happens should negative rates persist longer. The biggest immediate concern is over whether low rates will fuel housing bubbles. Fears that negative rates could lead to widespread hoarding of cash or banks charging all customers for current accounts have proven wide of the mark. Investors can hold physical cash as an alternative. But it seems that yields will have to be much more negative before they do that. In part, this is because of the nature of modern money; few people want to hold great piles of cash. It is neither convenient nor secure. Most modern money is electronic and that is subject to negative rates. Furthermore, many investors (pension funds, insurance companies, commercial banks, central banks) are forced, or at least accustomed, to holding government bonds for regulatory or accounting purposes; they are indifferent to price or yield.

A situation has now emerged where savers who pay the bank to hold their cash courtesy of negative deposit rates, are directly funding the negative interest rate paid to those who wish to take out debt. As per Duncan Kerr in euromoney, it may only be a matter of time before credit default swaps trade through zero too. At its simplest, mean one institution paying another institution for the privilege of insuring it against a bond default. It’s a seemingly crazy situation, but in a credit market distorted by quantitative easing and negative rates, anything may be possible.

According to Zero Hedge, that all this will end in blood and a lot of tears is clear to anyone but the most tenured economists, however in the meantime, we can’t wait to take advantage of the humorous opportunities that Europe (and soon Japan and the US) will provide in the coming months, as spending profligacy will be directly subsidized and funded by the insolvent monetary system, while responsible behavior and well-paid labor will be punished, first with negative rates and soon thereafter: with threats, both theoretical and practical, of bodily harm.

Total Loss Absorbing Capacity For Global Systemically Important Banks

On November 10, 2014 the Financial Stability Board (FSB) issued a long-awaited Consultative Document “Adequacy of loss-absorbing capacity of global systemically important banks in resolution” that defined a global standard for minimum amounts of Total Loss Absorbing Capacity (TLAC) to be held by Global Systemically Important Banks (G-SIBs). TLAC is meant to ensure that G-SIBs have the loss absorbing and recapitalization capacity so that, in and immediately following resolution, critical functions can continue without requiring taxpayer support or threatening financial stability.

The TLAC proposal is one of the final components of a long-standing reform effort laid out in 2010 by the FSB to limit the probability and impact of the failure of large global systemically important financial institutions, i.e., ending the too-big-to-fail (TBTF) phenomenon. At its core, TLAC bolsters capital and leverage ratios, thereby creating a greater capital cushion intended to further pre-empt any need for a taxpayer-funded bail-out.

At the global level, the G20 have agreed to a proposal that G-SIBs will have to fulfill in future regarding their capital structure. In particular, these banks will need to ensure a minimum amount of TLAC, which may be as high as 20 percent including the minimum capital requirements and the G-SIB buffer. This will make global banks more resilient, and it will allow for their orderly resolution.

TLAC will apply in addition to the capital requirements set out in the Basel III framework, including the countercyclical, G-SIB and other capital buffers. The measure appears challenging but manageable for most G-SIBs who will have until 2019 to meet the minimum Pillar 1 requirements.

As per the Consultative Document, the minimum TLAC requirement will be within the range of 16-20 percent of the group’s risk-weighted assets (RWA) and at least twice the fully loaded Basel III leverage ratio requirement. This is considered the “Pillar 1” requirement according to the FSB. Regulatory authorities may set additional requirements above their so-called minima, also known as the “Pillar 2” component of TLAC.

The interest at this stage from traditional consumers of bank paper, such as pension funds and insurers, is lukewarm at best. While the securities, designed to be written down in a crisis, would offer higher yields than senior debt, the risk of bail-in may be more than some buyers can tolerate. That could leave the banks struggling to meet regulatory requirements.

Banks already issue dated subordinated debt with mandatory coupons that banks can count toward some existing loss-absorbency requirements. Those notes, which have an established investor base, potentially could also be used to meet TLAC. That would be expensive: average yields on Tier 2 debt are 1.53 percent, more than double the 0.70 percent yield on banks’ senior bonds in euros, according to Bank of America Merrill Lynch index data.

On February 2, 2015 the Institute of International Finance (IIF) and the Global Financial Markets Association (GFMA) jointly submitted a letter to FSB on the Consultative Document. In general, the industry supports the concept that the FSB has developed. Assuring that loss-absorbing capacity is available if a G-SIB needs to be resolved is something the industry agrees to be essential. Nevertheless, a reform of this magnitude naturally raises many practical issues that have to be considered during the implementation of the new TLAC concept. Thematically, the most important areas include:

  • Historical evidence suggests that 16% of risk-weighted assets will be a sufficient level of TLAC to absorb potential losses for G-SIBs in the future.
  • The current drafting of TLAC subordination requirements raises important implementation difficulties, both for groups funded via holding company structures and for groups funded at the operating parent company or bank level.
  • The disposition of Internal TLAC will involve a delicate balancing of home and host regulatory interests, ideally aligning these interests to support cross-border cooperation.
  • Upon implementation, it’s estimated that the new framework would govern about US$4 trillion in TLAC-eligible securities. For issuance at this scale to be effective, it will need to be supported by broad, deep, liquid and diverse markets.

Last month a slew of European banks issued 10-year bullet maturity Basel III-compliant, tier-2 (B3T2) subordinated bond deals, as they sought to grow a new market for these lower cost TLAC-eligible instruments. Deutsche Bank attracted a €4.4 billion order book for its €1.25 billion deal priced at 210 basis points over mid-swaps. BNP Paribas drew €5.5 billion of demand for its €1.5 billion offering at 170 basis points over, while Société Générale took €3.8 billion of orders for a €1.25 billion transaction at 190 basis points over.

Negative-Yield Bond Universe is $2.35 Trillion!

As part of its €1.1 trillion quantitative easing plan, the European Central Bank (ECB) will buy government bonds due between two- and 30-years, including those with negative yields, President Mario Draghi said in January. The bond buying plan has left $1.9 trillion of the euro region’s government securities with negative yields.

Germany sold five-year notes at an average yield of minus 0.08 percent on February 25, a euro-area record, meaning investors buying the securities will get less back than they paid when the debt matures in April 2020. By the next day, German notes with maturity out to seven years had sub-zero yields — reached minus 0.017 percent. The rates on seven other euro-area nations’ debt were also negative.

The German bond markets are leading this historical phenomenon — 88 of the 346 securities in the Bloomberg Euro zone Sovereign Bond Index have negative yields. Euro-area bonds make up about 80 percent of the $2.35 trillion of negative-yielding assets in the Bloomberg Global Developed Sovereign Bond Index.

The seemingly illogical willingness of investors to pay issuers to borrow their money is neither irrational nor driven by just noncommercial considerations (such as regulatory requirements or forced risk aversion). As the ECB prepares to start its own large-scale purchasing program next week, some investors believe they could make capital gains on such negative yielding investments.

The ultra-low interest rate regime is likely to persist for now and this has caused challenges for banks. A growing number of European banks are now charging depositors for holding their funds.

Mohamed El-Erian commented that there are few analytical models, and even fewer historical examples, to help understand the broader economic, financial, political and social implications of all this — particularly for a global financial system based on the assumption of positive nominal rates. We are truly in unchartered waters. Accentuated by the illusion of market liquidity, this is a world in which small adjustments in probabilities of future outcomes — if and when they occur — could result in sharp movements in asset prices.


El-Erian, Mohamed (2015): “10 Things to Know About Negative Bond Yields”, Bloomberg View, February 27.

Goodman, David and Lukanyo Mnayanda (2015): “Germany’s Negative-Yield Universe Extends as ECB Prepares to Buy”, Bloomberg Business, February 26.

Goodman, David and Lukanyo Mnayanda (2015): “Euro-Area Negative-Yield Bond Universe Expands to $1.9 Trillion”, Bloomberg Business, February 28.

JPMorgan Shows Why It Pays To Turn Money Away

Traditional bank runs were driven by massive withdrawals of deposits by customers. On February 24, JPMorgan Chase & Co. (JPM) announced plans for an inverted bank run — it will push certain customers to withdraw what one executive has described as bad deposits.

Central banks around the world have pushed since the crisis to increase the minimum amount of capital that banks hold, in the hope that it will protect banks in the case of a crisis. Banks can increase their capital by raising money from shareholders or retaining profits, but this generally makes the cost of doing business more expensive.

Bigger banks have always had to hold more capital, but in December the Federal Reserve Bank proposed new surcharges for the largest, most systemically important banks, and indicated that JPM would face a higher surcharge than any other institution. The so-called GSIB surcharge is expected to force JPM to hold 4.5% more capital than a standard bank. The way this surcharge will be calculated under the rules proposed by the Fed in December “heavily penalizes” non-operational deposits.

JPM says it plans to reduce such deposits by up to $100 billion by the end of the year. The unwanted funds are primarily “non-operational deposits” from financial institutions. That is, deposits that aren’t connected to a company’s daily cash management, payment services or other banking activities.

According to JPM’s CFO: so-called “non-operational deposits”, which account for about $200 billion of JPM’s $390 billion in deposits from financial institutions, provide minimum net income and provide no liquidity benefit.

JPM is willing to turn away such funds speaks volumes about the new, more-stringent regulatory climate facing the biggest banks, as well as the continued pressure being exerted by the super low interest-rate environment.

Under the new regime, a big hedge fund or private equity firm or a foreign bank would be encouraged to shift excess cash into other JPM products such as money market funds, or find a new bank to hold their money.

The primary impetus for JPM’s deposits move is a new liquidity rule that looks to ensure banks have a healthy stock of assets that can easily be converted to cash in a stress scenario. It obliges banks to invest all uninsured, non-operational deposits from financial companies in officially sanctioned “high-quality liquid assets.” In practice, most are effectively placed as cash at the Federal Reserve. As a result, these assets earn little to no returns and can’t be used to fund loans. That reduces interest income and squeezes net interest margins, or the difference between what a bank makes borrowing and lending money.

Cash moved out of non-operational deposits will most likely find its way into money-market funds, short-duration bond funds and individual securities. Increased demand for safe assets from these investors could put further downward pressure on interest rates.

In the meantime, it is likely that more banks will follow JPM’s lead in chasing away unattractive deposits.


Carney, John and David Reilly (2015): “J.P. Morgan Shows Why It Pays to Turn Money Away”, The Wall Street Journal, February 24.

McLannahan, Ben (2015): “JPMorgan to charge fees for big deposits”, Financial Times, February 24.

Popper, Nathaniel (2015): “JPMorgan Chase Insists It’s Worth More as One Than in Pieces”, The New York Times, February 24.

Bolstering Financial Inclusion

Financial deepening has accelerated in emerging market and low-income countries over the past two decades. The record on financial inclusion, however, has not kept apace. Large amounts of credit do not always correspond to broad use of financial services, as credit is often concentrated among the largest firms. Moreover, firms in developing countries evidently continue to face barriers in accessing financial services. The lack of financial inclusion contributes to persistent income inequality and slower growth and lack of access to basic financial services is still a major challenge in developing countries.

Large gaps exist in worldwide access to finance. 58% of the firms in developing countries and only 20% of those in low-income countries have access to bank credit. 51% of firms in advanced economies use a bank loan or line of credit as compared with 34% in developing economies.

Given that financial inclusion is multi-dimensional, involving both participation barriers and financial frictions that constrain credit availability, policy implications to foster financial inclusion are likely to vary across countries. Small and medium enterprises (SME) continue to face barriers that further impede access to finance, such as high costs, high collateral requirements, travel distance, and onerous paperwork. This forces individuals to rely on their limited savings to become entrepreneurs. Once established, these enterprises tend to depend on self-financing to meet investment needs. This, in turn, limits the overall size of the firm, the ability to innovate, and productivity.

To examine how best to increase financial inclusion, IMF conducted a study on three low-income countries: Kenya, Mozambique and Uganda and on three emerging market (EM) countries: Egypt, Malaysia, and the Philippines. They have found:

  1. Disentangling constraints to financial inclusion is crucial. Understanding the specific factors that hold back financial inclusion, therefore, is critical for tailoring policy advice. The focus of public policy should thus be on ameliorating the most pressing financial frictions.
  2. Distributional consequences could be sharp. The consequences of increased financial inclusion can be uneven. It’s observed that the most effective policy for increasing access to finance — lowering the cost of participation in the financial system — benefits the poor, but wealthy firms can lose somewhat as a result of higher interest rates and wages. By contrast, it’s found found that policies that target financial depth — such as relaxing collateral requirements — benefit productive firms. Yet such policies also can impose losses on less productive firms as well as those with low credit demand, regardless of whether financial inclusion policies are in effect.

Different dimensions of financial inclusion can result in different distributional consequences. There is no one-size-fits-all policy prescription for increasing financial inclusion. A key first step is to develop appropriate legal, regulatory, and institutional frameworks and a supporting information environment.

The government has a central role to play in dismantling obstacles to financial inclusion by introducing laws that protect property or creditor rights and ensuring that these laws are adequately enforced. It can also set standards for disclosure and transparency and promote credit information-sharing systems and collateral registries. More fundamentally, it has a role in educating and protecting consumers.

Governments could also consider policies such as granting exemptions from onerous documentation requirements, allowing alternate delivery channels like banking correspondents, and shifting to the use of electronic payments into bank accounts for government payments. By moving forward with these policy measures, governments can make big inroads into increasing financial inclusion, reducing inequality, and boosting growth.

Much-needed Correction Or Dubious Data?

India changed its gross domestic product (GDP) calculations and caught everyone by surprise on January 30th, with the revisions suggesting Asia’s third-largest economy is in much better shape than we thought it was.

The government now will calculate growth based on 2011-12 market prices rather than the previous method of using 2004-05 factor costs. The changes are due to a database that includes more companies, better coverage of rural and urban government bodies, and the inclusion of taxes. Information is also included from stock brokers and exchanges, as well as mutual and pension funds and market regulators.

The new methodology indicates that Indian economy surged 6.9% in the year through March 2014 instead of the previously reported 4.7%, while GDP marginally contracted to 113.5 trillion rupees ($1.83 trillion) from 113.6 trillion. The revision takes India’s growth closer to the fastest-growing major economy in the world, China’s 7.4%.

Although the new method brings the Indian data in line with the International Monetary Fund (IMF) and global counterparts, the extent of upward revision is quite sharp and all future estimates have to be re-calibrated. The consequences of the inability to accurately chart a trend could be immediate. Reserve Bank of India (RBI) is meeting tomorrow to decide whether to cut rates for a second time in three weeks, had earlier predicted that inflation would stay below-target until January 2016, based on  forecast of growth at 5.5% for the current fiscal year.

“If poverty were communicable, its incidence would be far lower by now”

I today read an excellent article — The State of Global Poverty by Senior Vice President and Chief Economist of the World Bank Kaushik Basu in Project Syndicate. Here is an excerpt from his article.

The economic geography of the world is changing. The eurozone faces the specter of another round of stagnation; Japan has slipped into recession; and the United States, despite relatively strong performance in the latter part of 2014, has raised concerns worldwide with its exit from quantitative easing. Meanwhile, emerging economies have continued to perform well. India and Indonesia are growing at more than 5% per year; Malaysia at 6%; and China by more than 7%.

The scale of the global change can be seen when purchasing power parity (PPP) – a measure of the total amount of goods and services that a dollar can buy in each country – is taken into account. According to the figures for 2011, released last year, India is now the world’s third largest economy in terms of PPP-adjusted GDP, ahead of Germany and Japan. The data also revealed that China would overtake the US as the world’s largest economy in PPP terms sometime in 2014 – a shift that, according to World Bank estimates, occurred on October 10th.

Despite this progress, a large proportion of people in developing countries remain desperately poor. Globally, the poverty line is defined as a daily income of $1.25, adjusted for PPP – a line that many criticize as shockingly low. But what is truly shocking is that nearly one billion people – including more than 80% of the populations of the Democratic Republic of Congo, Madagascar, Liberia, and Burundi – live below it.

One reason global poverty has been so intractable is that it remains largely out of sight for those who are not living it, safely somebody else’s problem. If poverty were communicable, its incidence would be far lower by now.

Another reason poverty endures is persistent – and, in many places, widening – inequality. The current level of global inequality is unconscionable. According to some back-of-the-envelope calculations, the wealth of the world’s 50 richest people totals $1.5 trillion, equivalent to 175% of Indonesia’s GDP, or a little more than Japan’s foreign-exchange reserves. If one assumes that this wealth yields 8% per year, the annual income of the world’s 50 wealthiest people is close to the total income of the poorest one billion – in other words, those living below the poverty line.

Global Economy Faces Strong And Complex Cross Currents

The world economy is facing strong and complex cross currents.  On the one hand, major economies are benefiting from the decline in the price of oil.  On the other, in many parts of the world, lower long run prospects adversely affect demand, resulting in a strong undertow.

International Monetary Fund (IMF) released World Economic Outlook Update yesterday in Beijing, China. IMF expect stronger growth in 2015 than in 2014, however their forecast is down from last October. The forecast for global growth in 2015 is 3.5%, three-tenth of a percent higher than global growth in 2014, but three-tenth of a percent less than their forecast in October. For 2016,  IMF forecast 3.7% growth, again a downward revision from the last World Economic Outlook.

The cross currents make for a complicated picture for the countries. Good news for oil importers, bad news for exporters. Good news for commodity importers, bad news for exporters. The oil price decline increases real income, decreases costs of production for firms, and both lead to more spending. The effect can potentially be large. To the extent that the price decrease is persistent, oil exporters will have to reduce their level of government spending. Some energy firms may also face financial risks.

Since August 2014, the dollar has appreciated in real terms by 7%, the euro has depreciated by 3%, and the yen by 10%. Good news for countries more linked to the euro and the yen, bad news for those more linked to the dollar. In short, many different combinations, many different boxes, and countries in each box.

IMF forecasts reflect the increasing divergence between the United States on the one hand, and the Euro area and Japan on the other.  For 2015, they have revised US growth up to 3.6%, Euro area growth down to 1.2%, Japan growth down to six-tenth of a percent. Some of the largest downward revisions are in emerging markets, notably in Sub-Saharan Africa, the economies of the Commonwealth of Independent States (CIS), and Latin America. They were smaller in Emerging Asia, where growth is still very high, particularly in its leading economies like India (6.3% for 2015 and 6.5% for 2016) and China (6.8% for 2015 and 6.3% for 2016).

Unfortunately, the positive developments are offset by bad news on a number of fronts. Economic Counsellor and Director of the Research Department of the IMF Olivier Blanchard said that assessing the favorable effects of the decline in the price of oil in the current environment is difficult. This decline may turn out to be a stronger “shot in the arm” than is implicit in the forecasts.


Blanchard, Oliver (2015),  Global economy faces strong and complex cross currents, iMFdirect – The IMF Blog, 19 January.

International Monetary Fund (2015),  World Economic Outlook Update, IMF, January.

The Road To Normal Is Proving To Be Bumpy

Simon Kennedy said that stunning monetary-policy shifts in Switzerland and India sent markets on wild rides, highlighting Federal Reserve Chair Janet Yellen’s November warning that “normalization could lead to some heightened financial volatility.”

Today, Reserve Bank of India (RBI) cut their key interest rate for the first time in 20 months and Swiss National Bank (SNB) abandoned a three-year-old cap on the franc’s gains. Both decisions were unscheduled and, in Switzerland’s case, unexpected. Swiss franc surged 27% against US dollar while the surprise rate cut by RBI boosted benchmark stock indices 2.6%, the biggest percentage gain since May 9th, 2014. These decisions indicate the prevailing divergence in the global economy. Central banks are no longer aligned and they are often a source of volatility.

SNB dismantled the franc’s 1.20 per euro ceiling a week before the ECB’s expected announcement of quantitative easing. That move would intensify upward pressure on Swiss franc, rendering the cap untenably expensive. RBI reduced the repo rate by 25 basis points to 7.75% after weakening of inflation giving them room to support the Indian economy growing half the pace of four years ago.

In the end, central banks showed that they still have the power to stun. Forward guidance has its limits as policy can shift abruptly when economic conditions change and officials still like the odd surprise. Axel Weber, former Bundesbank president and now chairman of UBS Group AG commented “Better an end with a shock, than shocks with no end.”

Banks Are Adjusting Their Activities To Absorb Bank Levy

On April 16th, 2010, the International Monetary Fund (IMF) proposed the idea of a “financial stability contribution.” It was proposed as one of three possible options to deal with the crisis similar to the recent financial crisis of 2007-10. These options were presented in response to an earlier request of the G-20 leaders, at the September 2009 Pittsburgh summit, for an investigative report on all possible options to deal with the crisis. Financial stability contribution or bank levy is a tax on banks’ balance sheets (most probably on their liabilities or possibly on their assets) whose proceeds would most likely be used to create an insurance fund to bail them out in any future crisis rather than making taxpayers pay for bailouts. This is in addition to existing deposit insurance schemes, which is primarily to cover discrete failures in normal times.

Bank distress can have severe negative consequences for the stability of the financial system, the real economy, and for public finances. Regimes for the restructuring and resolution of banks, financed by bank levies and fiscal backstops, seek to reduce these costs. Bank levies attempt to internalize systemic risk and to increase the costs of leverage.

In case of a crisis, the management, shareholders, and creditors do not bear the full systemic costs of a failure, while the real economy feels the burden and society pays the price, whether in the form of bailouts, lost productivity or unemployment. While profits remain privatized in good times, downside risks are socialized.

Systemic banking crises have imposed fiscal costs of up to 7 percent of gross domestic product (GDP) in some countries, and output has fallen by 23 percent compared with long-run trends. Crises increase public debt significantly, aggravating the risk of public sector default.

To lower the probability of banking crises and internalize the costs of bank distress, policy makers have chosen two main instruments. First, the new Basel III regulations impose higher capital requirements for banks (and thus lower leverage), demand better quality of regulatory bank capital, and implement capital buffers to account for systemic risk. Second, regimes for restructuring and restoring banks have been established. They rely on fiscal backstops and bank levies, which seek to both internalize systemic risk and increase the costs of leverage.

Following the financial crisis and the subsequent imbalances for financial institutions and even national economies, legislators all over the world have introduced various measures concerning the regulation and supervision of financial institutions and financial markets. In this context, some countries have introduced bank levies some of which have been given the form of a tax while some others are regulatory levies. Since 2009, 14 countries have introduced compulsory bank levies (Belgium, Finland, France, Germany, Hungary, Iceland, Korea, the Netherlands, Portugal, the Slovak Republic, Slovenia and the United Kingdom) or stability fees (Austria, Belgium and Sweden). In addition, Greece has operated a bank levy since 1975 and Australia has had a supervisory levy dating back to 1998. With the exception of Finland and Slovenia, these are permanent measures.

Bank levies are generally calculated by taking banks’ total liabilities and deducting equity and retail deposits/insured deposits, etc. Every country has different rate and formula to determine the composition of the tax base. In a few countries like France, it is levied on the amount of risk-weighted banks’ assets, which are used for the determination of banks’ capital requirement. Also, the notional amount of off-balance sheet financial derivatives less used for hedging etc are included in some cases.

A research conducted in Germany to study the effect of the bank levy indicated that in the short run, banks could adjust by reducing their lending activities, increasing their loan rates, and/or lowering deposit rates to compensate for the increase in their funding costs due to the levy. The extent of this adjustment depends on the pricing power in loan markets. In the long run, a bank levy might also affect banks’ risk-taking behaviour.

As a consequence of negative deposit rate policy of the European Central Bank (ECB), the profit margin of the European banks are getting squeezed. Many German banks have partially passed on the cost of levy to their customers in December 2014 on selective basis.


Buch, C. M., B. Hilberg and L. Tonzer (2014), Taxing banks: an evaluation of the German bank levy, Discussion Paper No. 38/2014, Deutsche Bundesbank, Frankfurt.

OECD Special Feature (2013), Revenue Statistics 1965-2012, OECD.

OECD (2012), Funding Systemic Crisis Resolution, Presentation given at the Meeting of the Investment Committee, Paris, 20 March 2012.