The Swiss have eliminated the Zero Lower Bound

So, this is fun. Via Zero Hedge comes this report from a little Swiss website, Schweizer Radio und Fernsehen (SRF). It seems that a pension fund tried to evade negative rates on deposits by withdrawing a very large amount of physical cash with the intention of vaulting it. But the bank refused to allow it to withdraw the money in the form of physical cash.

Is this lawful? Zero Hedge thinks it isn't. But the bank has not refused to allow the money to be withdrawn. It has simply restricted the form in which the money can be taken. Since electronic money and physical cash are fully fungible, it is hard to see how this restriction can be regarded as unlawful without undermining the value of electronic money - which would be highly destabilising in a modern monetary economy.

And this effectively means that the zero lower bound does not exist.....

Read the whole article on Forbes.

Related reading:

The ECB's policy mix is poison for banks - FT
The strange world of negative interest rates


  1. Regardless of the legality, this just doesn't seem right. A demand deposit is a promise to provide cash, on demand - that's why it is considered a liability. If you prevent this, then you undermine the very notion of a deposit. Something like this would be wildly unpopular in the UK, and in the US is I suspect, so I don't think it would be politically tenable for long right now.

    1. No. A deposit is a promise to repay a loan on demand. The form that repayment takes is not specified. It may be in physical cash, it may be in the form of a cheque, it may be in the form of an electronic transfer of funds. Most deposit redemptions these days are in the latter form.

    2. Many would argue cheques and electronic transfers only have value because you transfer the underlying cash liability with it. Refusing to allow cash withdrawal is as good as reneging on that liability to most people.

    3. This is a fundamental misunderstanding of the nature of a deposit. A deposit is simply an unsecured loan to a bank. As with any other debt, as a last resort a depositor can insist (through the courts) that it is repaid in legal tender. But most debts are not settled in legal tender. Most debts, including debts settled through the courts, are settled in the form of electronic money or cheques. Bank deposits are no exception.

    4. I think where you may be getting confused is over the implied suspension of guaranteed convertibility at par if banks refuse to allow deposit withdrawals in physical cash. But I dispute this. No-one is suggesting that all physical cash withdrawals would be refused, only large ones. The majority of cash withdrawals are small. Therefore I would suggest that par convertibility is generally preserved. It is only those who seek to evade monetary policy who find convertibility suspended.

    5. It's not going to work. Preventing laundering is a fair justification, but preventing people from doing so to enforce negative interest rates will cause a political crisis, I'm sure of it. Perhaps not if the negative interest rates are very low, but absolutely if people were making significant losses on their accounts, there is still a practical limit to how low nominal interest rates can go.

    6. Indeed, it is possible that the Swiss action could have negative political consequences. I don't deny that. I'm simply saying that the Swiss action, if uncontested, effectively eliminates the zero lower bound.

    7. But the zero-lower bound was always more about practical limits rather than what is theoretically possible. Having said that, I have actually heard convincing reasons for negative interest rates being contractionary if they are too far below 0, do you agree? That would imply there is an effective zero lower bound in the sense that pushing them below that value would have the opposite intended effect.

    8. I should make it clear (if you don't know this already from my previous work, see links at the end of the post) that I don't regard negative rates as a good thing. I think they have extremely strange effects that we don't understand and can't predict. I don't accept that there is a simple linear relationship between interest rates and growth, so I'm not prepared to say categorically that deeply negative interest rates are contractionary (although they may be), any more than I will say categorically that strongly positive interest rates are contractionary. So no, I don't accept that there is "technically" any zero lower bound at all. The zero lower bound is entirely psychological.

      (Though I use "psychological" pretty broadly. Bank runs are also psychological phenomena.)

    9. Does the bank have a former Icelandic bank manager?

    10. You're just wrong, Frances. I know the law on this in the US; the UK is similar; the Swiss law professor seems to indicate that Switzerland is the same. A demand deposit is a promise to repay the money IN LEGAL TENDER on demand. Which means cash.

    11. Nathanael,

      I'm well aware of legal tender laws, and yes, they apply to bank deposits just as they do to all other debts. But a debtor is not obliged in the first instance to settle debts in cash. Do you pay your mortgage, or your car loan, or your credit card in physical cash? No, you don't. In this case, other forms of payment are still available. It is hard to argue in court that a debtor has defaulted on a loan if the debtor has in fact offered payment in other forms than physical cash . So although in theory legal tender laws force banks to allow deposit withdrawals in physical cash, in practice I doubt if a court would find in the depositor's favour if other means of withdrawal were available.

  2. "A deposit is simply an unsecured loan to a bank. Bank deposits are no exception. "

    Almost none of the general public think of bank deposits this way. And this is important, the general public expect that they will be able to withdraw cash from their accounts. If any bank announced that they would no longer be servicing cash withdrawals, you can guarantee everyone would try and leave that bank and join another account, causing the bank to collapse. The understanding that cash withdrawals will get serviced on demand is absolutely fundamental to the value people hold for bank deposits.

    1. A deposit is simply an unsecured loan to a bank. I'm sorry, but that is all it is. Physical cash is one means by which the bank may settle its liability to its depositor, but not the only means.

      I think you seriously overstate the importance of physical cash and undervalue electronic money. People want to be able to get their money out of their deposit accounts, yes, but they are perfectly happy to do so by electronic transfer - indeed the vast majority of deposit account withdrawals are now electronic. And the most damaging bank runs in recent years have been electronic ones in which no physical cash has been involved. I expect that some online banks will eventually offer cashless accounts, and I don't think those banks will collapse.

    2. "I think you seriously overstate the importance of physical cash."

      I think you're underestimating the importance of cash, cash is still used a lot today. I still withdraw cash regularly, if my bank didn't allow me to do this, I would switch banks straight away - a deposit that doesn't allow cash withdrawals is of significantly less value to me. And cashless banks (or money storing services) do already effectively exist online, but I would never use them for the bulk of my money.

    3. You're reactionary. I am not young, but I rarely carry cash and almost never withdraw it directly from my account. Cashless accounts are the future.

    4. I'm not reactionary, I don't use cash for any political reason. I use it because it's often convenient to. A cashless society may happen one day, but I think that's decades away.

    5. I don't think you get it. If a bank can arbitrarily refuse to allow withdrawals -- which is what happened here -- it will remove the people's trust in banks. At that point, they will go straight to cash. If the government refuses to cooperate in providing cash, the next step is foreign currencies... followed by precious metals.

      This way lies madness. The entire breakdown of the banking system. The breakdown of the tax system, too. And it can and will happen, *very* quickly, if the pension funds are prevented from accessing their money.

      Frances, you are vastly underestimating the importance of cash. This is not a matter of opinion; this is simple fact.

      "A deposit is simply an unsecured loan to a bank." Exactly. And if the recipient of your unsecured loan refuses to pay up -- in cash -- then you will stop lending them money, and everyone else will stop lending them money as well.

      There's actually a set of rules called "legal tender" for payment of debts. Cash is legal tender. In most countries, *bank checks are not*. Think about what this means: the bank, by refusing to allow a cash withdrawal, has refused to make a legal tender for payment of the debt.

      The bank may not choose to pay the debt in any form other than legal tender! The lender (depositor) has the option of accepting payment in another form, but the lender (depositor) has the absolute right to demand legal tender.

      This will result in a lawsuit against the bank. The bank will most likely lose the lawsuit and pay out the cash. If it does not, things will go south very fast, as the entire banking system will be distrusted (for, uh, breaking the law and stealing money) and the government will also be distrusted (for, uh, breaking the law and stealing money). This is how you end up with people using gold as currency.

    6. Nathanael,

      Banks have the right to pay debts in forms other than legal tender, just as you do. If the creditor demands legal tender, he must do so through the courts. And as I said in my earlier comment, I doubt if refusal to pay in legal tender would be regarded as default by a court if payment by other means had been offered. After all, even legal debts such as court fines are not usually settled in legal tender. For example, in Scotland the only legal tender is coin. Do people pay speeding fines in bags of £1 coins? No, they do not. Mostly, they pay by electronic transfer or cheque. So I am not convinced that a lawsuit would succeed. Clearly, if it did, then the bank would be obliged to pay its creditors in physical cash.

  3. Part of a chart of accounts:

    Chart of Accounts for Banks
    Cash and Cash Equivalents
    1 0 0 1 Cash in vault
    1 0 0 2 Cash in ATM
    1 0 0 3 Cash in transit
    1 0 0 4 Damaged notes
    1 0 0 5 Travellers cheques
    1 0 0 6 Items for collection: cheques
    1 0 0 7 Items for collection: Plastic cards
    1 0 0 8 Items for collection: Other
    1 0 0 9 Settlement / Correspondent Accounts/Nostro Accounts
    1 0 1 0 Gyro accounts :b (Smily face here)
    1 0 1 1 Precious metals
    1 0 1 2 Other cash
    1 0 1 3 Coverage under letters of credit with foreign banks
    1 0 1 4 Coverage under guarantees with foreign banks
    1 0 1 5 Clients’ funds from custody operation

    1. Yes, I know what a bank chart of accounts looks like. Your point is?

    2. Banks differentiates cash (currency) from "Items for collection: Checks". In fact it counts checks as uncollected. In fact the public and other entities differentiate between the two also. As evidenced by other comments and accounting which is a very quantitative way of describing things.

      Which of the three account classifications of real accounts, personal accounts, and nominal account classify Cash in vault and Items for collection: cheques accounts? Why does this classification matter in this case?

      Why does the bank's deposit slip list cash and checks separately? This shows an other differentiation.
      Here a picture of a deposit slip:

      Go on, look at your deposit slips every one.

      But, the articles seems to advocate that bank customers should consider and that many do consider their credits at the bank the same as cash. Which is not the case. To advocate that the publick accept what the bank would not accept as payment in full would be advocating a double standard.

      I am not sure if this is an exact quote of J.P. Morgan but the second part may be more important than the fist part these days. "Money is Gold. Every thing else is credit"

      Have you completed an accounting class? Have you done bookkeeping and closed a set of books that had separate accounts for cash and bank accounts?

    3. It is the basics of accounting.

      "The most common personal accounts are for those of debtors and creditors.", Items for collection: cheques falls under the personal account catagory doesn't it?

      "Principles of Accounts (Cxc)"
      By P. Hosein p.24 mainly but also p. 20,21

      I found it on google books.

      "Basic Accounting"
      By Rajni Sofat, Preeti Hiro p.54,86

      Also on google books.

      "Financial Accounting"
      By Mukherjee & Hanif, p. 2-18, transaction #4.
      Also available from google books.

  4. If a bank gets a check from the central bank instead of currency what would they do?

    1. Banks only get currency from the central bank to support physical cash withdrawals, which these days are a minority of customer transactions. The majority of transactions are electronic and are funded electronically by the central bank in the form of reserves. Electronic reserves form the majority of central bank funding (unfortunately you have not shown them in your chart of accounts example). You could say therefore that banks DO get "checks" from the central bank, and they use them as money.

    2. What is the name of the bank?

      I could not find the name.

  5. I don't believe it.

  6. This is much more serious than you think. The next move by the pension fund will be to sue the bank in court for their money, because the bank *is* required to allow a cash withdrawal. I repeat: required.

    If this is denied, it will result in an immediate slow-motion run on every single bank in Switzerland. Stupid move....

    1. No, Nathanael, it is not "required". Did you read what I said about money laundering rules? Banks can and do restrict physical cash withdrawals, and not just in Switzerland. They do so in most countries.

  7. I may be missing something, but what's stopping the depositor from transferring funds electronically to an institution that doesn't have this restriction (if necessary, an institution in another jurisdiction) & *then* taking the cash?

    1. So they haven't stopped anyone taking the cash so much as adding another line item to the costs of holding cash - the lower bound has got a bit further below zero, but it's still there. It's certainly a step towards Buiterworld, though - which in turn seems like a big shift in the balance of power towards the banks.

    2. Yes, that's a good way of putting it. They haven't stopped anyone removing the cash electronically to an account at another bank, including a foreign bank (say a Eurozone bank). They've just made it much more difficult to convert money in any form - including money in the form of financial assets such as Swiss government bonds - to physical Swissies.

  8. " without undermining the value of electronic money -"

    Long term that's obviously a problem. But for now, it only really applies to Switzerland. Would the Swiss Central Bank (rather than Swiss savers) be that bothered right now if Swiss francs in Swiss banks became worth a bit less? Bit of devaluation.

    BTW, if you come to my part of the world (Holloway road) best bring some cash as lots of shops/cafés don't accept cards for small payments.

    1. Where I live some small retailers won't accept cards either. In my example I did say that if accepting cards incurred fees, the retailer would prefer physical cash.

  9. The Swiss article was dated 12 March 2015 and nothing seemed to have developed since then. My guess is that the bank did pay up and status quo prevails. Some form of notice may be needed for large withdrawal, but depositors will get cash.

    So, when I walk into a bank and say I want to make a withdrawal and the cashier ask how would you like your money and I say "Cash", I expect cash.

  10. "At some point it becomes cost-effective to rent a warehouse for your billions in cash and hire armed guards to protect it. We may be seeing glimmerings of that in Switzerland, which has a 1,000 Swiss franc note ($1,040) that’s useful for large transactions. The number of the big bills in circulation usually peaks at yearend and then shrinks about 6 percent in the first two months of the new year, but this year, with negative rates a reality, the number instead rose 1 percent through February, according to data released on April 21."

    1. Yes, I suppose if CB want to be silly they can make A1 size note of $1000 franc so that they are much harder to carry or store..

  11. Here is some thing from a often successful short seller. (He shorted Enron.)

    " "If everyone knows you're going to print money ... you know ... welcome to Zimbabwe."

    Chanos argued that no country can print its way to wealth. Here he expounds on moral hazard, bailouts and quantitative easing:

    "It definitely is an issue with compounding of interest. By kicking this stuff down the road it grows faster than our ability to grow out of it. That's the real problem. That's what we're facing in Greece, we're facing that in the U.S. states, in municipalities, which are facing real budget issues and demographic issues. All these things compound at rates faster than at which depressed economies can grow out of it. ...You can fool people for a while, but after a while people don't want to hold your paper."

    Read more:


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