Cash in Vaults Tested by Munich Re Amid ECB's Negative Rates

Updated on
  • Reinsurer will store at least 10 million euros in experiment
  • Costs of cash insurance, logistics may outweigh benefits

Munich Re is resorting to the equivalent of stuffing notes under the mattress as the reinsurer seeks to avoid paying banks to hold its cash under the European Central Bank’s negative interest rates.

The German company will store at least 10 million euros ($11 million) in two currencies so it won’t have to pay for the right to access the money at short notice, Chief Executive Officer Nikolaus von Bomhard said at a press conference in Munich on Wednesday. “We will also observe what others are doing to avoid paying negative interest rates,” he said.

Nikolaus von Bomhard in Munich, on March 16.

Photographer: Sven Hoppe/AFP via Getty Images

Institutional investors including insurers, savings banks and pension funds are debating whether it may be worth bearing the insurance and logistics costs of holding physical cash as overnight deposit rates fall deeper below zero and negative yields dent investment returns. The ECB last week cut the rate on its deposit facility, which banks use to park excess funds, to minus 0.4 percent.

“This may well become a mass phenomenon once interest rates are low enough -- the only question will be where that exact point is,” said Christoph Kaserer, a professor of finance at the Technische Universitaet in Munich. “For large institutions, that may be the case sooner rather than later. The ECB will react with countermeasures, such as limiting cash.”

Munich Re’s strategy, if followed by others, could undermine the ECB’s policy of imposing a sub-zero deposit rate to push down market credit costs and spur lending. Cash hoarding threatens to disrupt the transmission of that policy to the real economy.

A spokesman for the ECB declined to comment, as did a spokeswoman for the Bundesbank.

Munich Re, which oversees a total of 231 billion euros in investments, wants to test how practical it would be to store banknotes, having already kept some of its gold in vaults, von Bomhard said. This comes at a time when consumers are increasingly using credit cards and electronic banking to pay for transactions. Deutsche Bank AG Chief Executive Officer John Cryan has predicted the disappearance of physical cash within a decade.

“This shows the difficulties that the ECB is facing in its efforts to stimulate the real economy,” said Andreas Oehler, a professor of finance at Bamberg University in Bavaria. “Charging negative rates on overnight liquidity doesn’t stimulate longer-term lending. All it does is make companies’ and institutions’ payment transactions more expensive.”

Munich Re, the world’s second-biggest reinsurer, also said on Wednesday that it expects its profit to decline this year as falling prices for its products and low interest rates weigh on investment earnings.

— With assistance by Alessandro Speciale, and Paul Gordon

(Updates with finance professor's comment in fourth paragraph.)
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