I know there were banks that actually charged a negative interest rate to consumers, does anyone know exactly how common this was and if it ever became wide spread? It would seem to be it would lead to a run on the banks and a collapse of the entire system if it was to actually happens.
The Economist this week has a little article on exactly this topic. Apparently, the small charge being applied to deposits by the commercial banks is painless enough that they are eating the loss and not passing it onto retail consumers. So, the deposit rates in Europe have actually been stable. However if rates become more negative and fees are passed on, the method of payment transactions and money storage could become vastly changed when consumers decide the fee to deposit money is less attractive than switching to cash based transactions.
I haven’t heard of it at retail level but if it has happened anywhere I would guess it would be in Switzerland. Any Swiss readers out there who can confirm? Interest rates have been negative for some time all across Europe for institutional money. Also now in Japan I believe.
With the headline rate at -0.75% in Switzerland, if they haven’t passed any of that on to consumers yet I would guess that it won’t happen anywhere. Possible impediment to further Central Bank easing I imagine.
Indeed it in Switzerland where I read one bank did it…
The second related question is, seems LIBOR went negative on the swiss frank at some point, how do we value interest rate floors and caps now… Do we have to allow our model to go to negative rates and if so how negative?
Infact if I was holding interest rate floor with a strike of 3% and say interest rate is -3% would my payout be 6%?
max(0,(strike price-market rate))