## Box 1 — Moving into negative territory

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---

### Overview
- Danmarks Nationalbank (DN), the European Central Bank (ECB), Sveriges Riksbank (SR), and the Swiss National Bank (SNB) cut key policy rates below zero from mid-2014 to early 2015.
- The Bank of Japan announced on 29 January 2016 that it would apply a rate of –10 bp to part of the balances in current accounts.

### Timeline of key rate actions
- ECB:
  - First move on 11 June 2014: cut the deposit rate to –10 basis points after having signalled the possibility for at least a year.
  - Lowered the deposit rate to –20 bp in September 2014.
  - Further lowered the deposit rate to –30 bp in December 2015.
- Danmarks Nationalbank (DN):
  - 5 September 2014: rate on certificates of deposit cut from +5 to –5 bp following a further rate cut by the ECB.
  - Four successive rate cuts over two and a half weeks took DN to –75 bp in early February 2015.
  - Increase to –65 bp in early 2016 following a reversal of appreciation pressure on the krone.
- Swiss National Bank (SNB):
  - 18 December 2014: went negative when it announced sight deposits exceeding a certain threshold would earn –25 bp effective 22 January 2015.
  - Announced a further 50 bp cut on 15 January 2015 in connection with the discontinuation of the minimum exchange rate vis-à-vis the euro.
- Sveriges Riksbank (SR):
  - Cut repo rate to –10 bp on 18 February 2015.
  - Cut to –25 bp in March 2015.
  - Further cuts to –35 bp in July 2015 and to –50 bp in February 2016.
- Bank of Japan:
  - 29 January 2016: announced application of –10 bp to part of balances in current accounts.

### Past episodes
- Sveriges Riksbank in 2009–10:
  - Repo rate cut to 25 bp on 8 July 2009.
  - Overnight deposit rate lowered to –25 bp to keep the interest rate corridor symmetrical at +/–50 bp.
  - Amount on deposit overnight was minuscule because the Riksbank typically uses daily fine-tuning operations (at 10 bp below the repo rate) to drain most excess liquidity prior to the close of business.
- Danmarks Nationalbank maintained negative certificate of deposit rates from mid-2012 to April 2014.

### Structure of liabilities and exemption practices
- Banking systems in each jurisdiction held reserves and other central bank liabilities above required amounts ("liquidity surplus").
- Form of liquidity surplus:
  - Euro area and Switzerland: held as overnight deposits (reserves).
  - Denmark and Sweden: combination of overnight and one-week liabilities.
- Exemptions:
  - ECB, DN, and SNB exempt at least part of reserve holdings from negative interest rates.

### Average remuneration on central bank liabilities (mid-February 2016)
- Average remuneration depends on both policy rates and exemption thresholds.
- Reported average rates in mid-February 2016:
  - Danish and Swedish central banks: just above –50 basis points.
  - SNB and ECB: around –25 basis points.
- Implication: jurisdictions with the most negative policy rates did not necessarily have the lowest average remuneration on central bank liabilities.

### Source note for Box 1
- National data; BIS Quarterly Review, March 2016.

---

### Box 2 — Design of remuneration schedules

### Design and calibration of remuneration schedules
- Four central banks apply negative rates to the majority of accounts to limit arbitrage between accounts.
- Exemption thresholds are used by the ECB, DN and SNB in computing negative remuneration.
- SNB exemption thresholds:
  - For banks subject to minimum reserve requirements: exemption threshold = 20 times the minimum reserve requirement prior to implementation (static component) minus/plus any increase/decrease in the amount of cash held (dynamic component). The dynamic component aims to prevent substitution of cash for sight deposits.
  - For account holders not subject to minimum reserve requirement: fixed exemption threshold with a minimum fixed threshold of CHF 10 million to avoid inhibiting the ability to settle Swiss franc payments.

### Central bank practices and specific rates
- European Central Bank (Eurosystem):
  - Required reserves earn the Main Refinancing Operations (MRO) rate – currently at 5 basis points – whereas excess reserves currently “earn” –30 basis points.
- Danmarks Nationalbank (DN):
  - Offers one-week certificates of deposit with a yield currently at –65 basis points.
  - Overnight demand deposits in the current account earn zero.
  - Uses aggregate and individual current account limits; deposits exceeding individual limits are converted into certificates of deposit if the aggregate limit is exceeded at end of day.
  - DN has varied current account limits: increased in March 2015, lowered in August 2015 and January 2016.
- Sveriges Riksbank (Sweden):
  - Issues one-week debt certificates.
  - Daily fine-tuning operations drain remaining reserves prior to close of business.
  - One-week debt certificates “yield” –50 basis points.
  - Fine-tuning operations earn –60 basis points.
  - Residual amounts in current account face negative “remuneration” of –125 basis points.
- Swiss National Bank (SNB):
  - Uses tiered remuneration and individual exemption thresholds; redistribution of reserves among banks led to increased secured money market trading.
- Bank of Japan (on moving below zero):
  - Current account balances divided into three tiers remunerated at +10 basis points, 0 basis points and –10 basis points, respectively.

### Central bank remuneration schedules — key statistics (mid-February 2016)
- Weighted average rate: –25 ; –52 ; –27 ; –52
- Marginal minus average rate4: –5 ; –8 ; –48 ; –13
- Notes:
  - 1 Amount of fine-tuning operations. In addition, overnight deposits with central bank represent SEK 0.01 billion.
  - 2 Rate applied to fine-tuning operations. Overnight deposits with central bank earn –125 basis points.
  - 3 Amounts above the aggregate current account limit are converted into one-week certificates of deposit (Box 2).
  - 4 Marginal rate is the rate on overnight deposits with central bank above exemption threshold.

### Spreads and changes since going negative
- Denmark: the spread between marginal and average costs ranged from –11 to –47 basis points as DN actively adjusted exemption thresholds.
- Switzerland: the spread has been around –50 basis points.
- ECB: the spread was approximately –5 basis points.
- Riksbank: the spread was approximately –8 basis points.

### Market functioning and money market transmission
- Modestly negative policy rates have transmitted to money market rates similarly to positive rates; money market functioning largely intact.
- Overnight rates in all four jurisdictions followed the policy rate below zero; negative policy rates passed through to other money market rates.
- Jurisdiction specifics:
  - Euro area and Switzerland: money market rates track central bank deposit rate.
  - Sweden: money market rates closely follow the repo rate.
  - Denmark: relationship less tight; tomorrow-next rate sometimes close to current account rate of zero, other days closer to or below certificate of deposit rate due to thin market and banks with differing reserve positions.
- Money market volumes:
  - Euro area: volumes stable after mid-2014 deposit rate went negative, but volumes dropped across maturities as excess liquidity increased.
  - Denmark: turnover in unsecured money market has declined since negative rates, partly due to higher amounts allowed in current accounts.
  - Switzerland: trading in secured money market increased moderately due to reshuffling driven by individual exemption thresholds; most reshuffling is overnight.
- Operational outcomes:
  - No widespread operational failures observed in money market instruments or repo collateral delivery.
  - Constant net asset value (NAV) money market funds initially adapted via maturity extension and, by end-2015, returns became systematically negative.

### Transmission beyond money markets and bank responses
- Negative policy rates coincided with decreases in longer-maturity and higher-risk yields, but isolating the effect of negative rates is difficult due to concurrent asset purchase programs and risk-premium fluctuations.
- Technical and contractual issues (negative coupons, market infrastructure) arose initially and were largely resolved.
- Banks have passed negative rates to wholesale depositors (negative wholesale deposit rates), sometimes using exemption thresholds similar to central banks.
- Banks reluctant to pass negative rates to retail depositors due to fear of large deposit withdrawals; shielding retail customers has likely limited cash hoarding.
- Swiss case: banks adjusted business terms and raised some lending rates (eg, mortgages) despite falling government and corporate bond yields.
- Danish case: mortgage rates fell with money market rates and government yields where mortgages are financed by pass-through bonds; new bank lending rates for new loans to non-financial corporations edged up in 2015.
- Institutional constraints (insurer unwillingness to buy negative cash flow securities, covered bond interest floors at zero) can weaken linkages and increase demand for hedging instruments (eg, Euribor options with 0% strikes).

### Effective lower bound and cash demand
- Primary motivation for the zero lower bound is the ability to earn zero nominal interest by holding physical currency.
- To date, negative policy rates have not produced an abnormal jump in cash demand in the four European jurisdictions reviewed; cash demand had been increasing earlier because rates were already very low.
- Costs of holding cash (transport, storage, insurance) imply the effective lower bound is somewhere below zero, but the bound may move up if negative rates persist long enough for agents to innovate and reduce cash-holding costs.
- Shielding of retail depositors from negative rates has been an important factor keeping cash demand stable; the banking sector’s ability to limit pass-through affects the effective lower bound.
- Prevalence of adjustable-rate and floating-rate debt can broaden exposure to negative rates and affect central banks’ technical room to move rates into negative territory.

---

### Conclusions

### Implementation and transmission of negative policy rates
- The introduction of moderately negative policy rates by the four central banks under review was "by and large achieved within their existing operational frameworks."
- Modestly negative policy rates are transmitted through to money market rates "in much the same way as positive rates."
- They "appear" to be transmitted to longer-maturity and higher-risk rates, although this assessment "is clouded by the impact of complementary monetary policy measures."
- Retail deposit rates have "remained insulated, partly by design."
- In Switzerland, negative rates have "actually raised, rather than lowered, mortgage rates."

### Limits, uncertainty and scope
- "Zero has not proved to be a technically binding lower limit for central bank policy rates."
- There is "great uncertainty" about the behaviour of individuals and institutions if rates were to decline further into negative territory or remain negative for a prolonged period.
- It is unknown whether the transmission mechanisms will continue to operate as in the past and not be subject to "tipping points."
- An extended period of negative interest rates has so far been limited to the euro area and neighbouring economies; "It is not clear how negative policy rates would play out in other institutional settings."

### Banknotes and coins in circulation
- The special feature includes discussion and a graph on banknotes and coins in circulation (Graph 5), with sources: European Central Bank; Datastream. (Graph labels include series for Euro area, Sweden, Switzerland, Denmark.)

### Financial system effects and open questions
- The special feature examined "exclusively the technical aspects of the implementation of negative policy rates" and did not address the question of the impact of negative policy rates on the financial system as a whole.
- Many questions remain, including:
  - The "debilitating impact of persistently negative interest rates on the profitability of the banking sector" has emerged as an important consideration (BIS (2016)).
  - Negative rates can weaken the profitability and/or soundness of institutions with long-duration liabilities, such as insurance companies and pension funds, "seriously challenging their business models."
- An assessment of the desirability of negative policy rates would require:
  - An evaluation of their effectiveness in achieving central bank objectives.
  - An evaluation of their more general impact on financial and macroeconomic stability.
- These broader assessments are "beyond the scope of this special feature."

*BIS Quarterly Review, March 2016.*

### Box 1

### Box 1 Moving into negative territory

### Overview
- Danmarks Nationalbank (DN), the European Central Bank (ECB), Sveriges Riksbank (SR), and the Swiss National Bank (SNB) cut key policy rates below zero over the period from mid-2014 to early 2015.
- The Bank of Japan announced on 29 January 2016 that it would apply a rate of –10 bp to part of the balances in current accounts.

### Timeline of key rate actions
- ECB:
  - First move on 11 June 2014: cut the deposit rate to –10 basis points after having signalled the possibility for at least a year.
  - Lowered the deposit rate to –20 bp in September 2014.
  - Further lowered the deposit rate to –30 bp in December 2015.
- Danmarks Nationalbank (DN):
  - 5 September 2014: rate on certificates of deposit cut from +5 to –5 bp following a further rate cut by the ECB.
  - Four successive rate cuts over two and a half weeks took DN to –75 bp in early February 2015.
  - Increase to –65 bp in early 2016 following a reversal of appreciation pressure on the krone.
- Swiss National Bank (SNB):
  - 18 December 2014: went negative when it announced sight deposits exceeding a certain threshold would earn –25 bp effective 22 January 2015.
  - Announced a further 50 bp cut on 15 January 2015 in connection with the discontinuation of the minimum exchange rate vis-à-vis the euro.
- Sveriges Riksbank (SR):
  - Cut repo rate to –10 bp on 18 February 2015.
  - Cut to –25 bp in March 2015.
  - Further cuts to –35 bp in July 2015 and to –50 bp in February 2016.
- Bank of Japan:
  - 29 January 2016: announced application of –10 bp to part of balances in current accounts.

### Past episodes
- Sveriges Riksbank had previously flirted with negative policy rates in 2009–10:
  - Repo rate cut to 25 bp on 8 July 2009.
  - Overnight deposit rate lowered to –25 bp to keep the interest rate corridor symmetrical at +/–50 bp.
  - Amount on deposit overnight was minuscule because the Riksbank typically uses daily fine-tuning operations (at 10 bp below the repo rate) to drain most excess liquidity prior to the close of business.
- Danmarks Nationalbank maintained negative certificate of deposit rates from mid-2012 to April 2014.

### Structure of liabilities and exemption practices
- Banking systems currently hold reserves and other central bank liabilities above required amounts ("liquidity surplus") in each jurisdiction.
- Form of liquidity surplus:
  - Euro area and Switzerland: held as overnight deposits (reserves).
  - Denmark and Sweden: combination of overnight and one-week liabilities.
- Exemptions:
  - ECB, DN, and SNB exempt at least part of reserve holdings from negative interest rates (see Box 2 in source).

### Average remuneration on central bank liabilities (mid-February 2016)
- Average remuneration depends on both policy rates and exemption thresholds.
- Reported average rates in mid-February 2016:
  - Danish and Swedish central banks: just above –50 basis points.
  - SNB and ECB: around –25 basis points.
- Implication: jurisdictions with the most negative policy rates did not necessarily have the lowest average remuneration on central bank liabilities.

*Source: National data; BIS Quarterly Review, March 2016.*

### Box 2

### Box 2 — Design of remuneration schedules

### Design and calibration of remuneration schedules
- Four central banks apply negative rates to the majority of accounts to limit arbitrage between accounts.
- Exemption thresholds are used by the ECB, DN and SNB in computing negative remuneration.
- SNB exemption thresholds:
  - For banks subject to minimum reserve requirements: exemption threshold = 20 times the minimum reserve requirement prior to implementation (static component) minus/plus any increase/decrease in the amount of cash held (dynamic component). The dynamic component aims to prevent substitution of cash for sight deposits.
  - For account holders not subject to minimum reserve requirement: fixed exemption threshold with a minimum fixed threshold of CHF 10 million to avoid inhibiting the ability to settle Swiss franc payments.

### Central bank practices and specific rates
- European Central Bank (Eurosystem):
  - Required reserves earn the Main Refinancing Operations (MRO) rate – currently at 5 basis points – whereas excess reserves currently “earn” –30 basis points.
- Danmarks Nationalbank (DN):
  - Offers one-week certificates of deposit with a yield currently at –65 basis points.
  - Overnight demand deposits in the current account earn zero.
  - Uses aggregate and individual current account limits; deposits exceeding individual limits are converted into certificates of deposit if the aggregate limit is exceeded at end of day.
  - DN has varied current account limits: increased in March 2015, lowered in August 2015 and January 2016.
- Sveriges Riksbank (Sweden):
  - Issues one-week debt certificates.
  - Daily fine-tuning operations drain remaining reserves prior to close of business.
  - One-week debt certificates “yield” –50 basis points.
  - Fine-tuning operations earn –60 basis points.
  - Residual amounts in current account face negative “remuneration” of –125 basis points.
- Swiss National Bank (SNB):
  - Uses tiered remuneration and individual exemption thresholds; redistribution of reserves among banks led to increased secured money market trading.
- Bank of Japan (on moving below zero):
  - Current account balances divided into three tiers remunerated at +10 basis points, 0 basis points and –10 basis points, respectively.

### Central bank remuneration schedules — key statistics (mid-February 2016)
- Central banks (columns correspond to: European Central Bank; Sveriges Riksbank; Swiss National Bank; Danmarks Nationalbank)
- Exemption thresholds / Local currency, in billions / Term (one-week) / Policy rates (basis points)
  - Overnight deposits (reserves) — Below threshold: 113; –50
  - Overnight deposits (reserves) — 303 29
  - Above threshold: 650 170 .
  - Term (one-week): . 187 . 119
  - Policy rates — Overnight deposits (reserves) — Below threshold: 5; –60 2
  - Policy rates — Overnight deposits (reserves) — 0 0
  - Above threshold: –30 –75 .
  - Term (one-week): . –50 . –65
- Weighted average rate: –25 ; –52 ; –27 ; –52
- Marginal minus average rate4: –5 ; –8 ; –48 ; –13
- Notes from table:
  - 1 Amount of fine-tuning operations. In addition, overnight deposits with central bank represent SEK 0.01 billion.
  - 2 Rate applied to fine-tuning operations. Overnight deposits with central bank earn –125 basis points.
  - 3 Amounts above the aggregate current account limit are converted into one-week certificates of deposit (Box 2).
  - 4 Marginal rate is the rate on overnight deposits with central bank above exemption threshold.

### Spreads and changes since going negative
- Denmark: the spread between marginal and average costs ranged from –11 to –47 basis points as DN actively adjusted exemption thresholds.
- Switzerland: the spread has been around –50 basis points.
- ECB: the spread was approximately –5 basis points.
- Riksbank: the spread was approximately –8 basis points.

### Market functioning and money market transmission
- Overall: modestly negative policy rates have transmitted to money market rates similarly to positive rates; money market functioning largely intact.
- Overnight rates in all four jurisdictions have followed the policy rate below zero; negative policy rates have passed through to other money market rates.
- Jurisdiction specifics:
  - Euro area and Switzerland: money market rates track central bank deposit rate.
  - Sweden: money market rates closely follow the repo rate.
  - Denmark: relationship less tight; tomorrow-next rate sometimes close to current account rate of zero, other days closer to or below certificate of deposit rate due to thin market and banks with differing reserve positions.
- Money market volumes:
  - Euro area: volumes stable after mid-2014 deposit rate went negative, but volumes dropped across maturities as excess liquidity increased.
  - Denmark: turnover in unsecured money market has declined since negative rates, partly due to higher amounts allowed in current accounts.
  - Switzerland: trading in secured money market increased moderately due to reshuffling driven by individual exemption thresholds; most reshuffling is overnight.
- No widespread operational failures observed in money market instruments or repo collateral delivery; constant net asset value (NAV) money market funds initially adapted via maturity extension and, by end-2015, returns became systematically negative.

### Transmission beyond money markets and bank responses
- Introduction of negative policy rates coincided with decreases in longer-maturity and higher-risk yields, but isolating the effect of negative rates is difficult due to concurrent asset purchase programs and risk-premium fluctuations.
- Technical and contractual issues (negative coupons, market infrastructure) arose initially and were largely resolved.
- Banks have passed negative rates to wholesale depositors (negative wholesale deposit rates), sometimes using exemption thresholds similar to central banks.
- Banks reluctant to pass negative rates to retail depositors due to fear of large deposit withdrawals; shielding retail customers has likely limited cash hoarding.
- Swiss case: banks adjusted business terms and raised some lending rates (eg, mortgages) despite falling government and corporate bond yields.
- Danish case: mortgage rates fell with money market rates and government yields where mortgages are financed by pass-through bonds; new bank lending rates for new loans to non-financial corporations edged up in 2015.
- Institutional constraints (insurer unwillingness to buy negative cash flow securities, covered bond interest floors at zero) can weaken linkages and increase demand for hedging instruments (eg, Euribor options with 0% strikes).

### Effective lower bound and cash demand
- Primary motivation for the zero lower bound is the ability to earn zero nominal interest by holding physical currency.
- To date, negative policy rates have not produced an abnormal jump in cash demand in the four European jurisdictions reviewed; cash demand had been increasing earlier because rates were already very low.
- Costs of holding cash (transport, storage, insurance) imply the effective lower bound is somewhere below zero, but the bound may move up if negative rates persist long enough for agents to innovate and reduce cash-holding costs.
- Shielding of retail depositors from negative rates has been an important factor keeping cash demand stable; the banking sector’s ability to limit pass-through affects the effective lower bound.
- Prevalence of adjustable-rate and floating-rate debt can broaden exposure to negative rates and affect central banks’ technical room to move rates into negative territory.

*Sources: Central banks; authors’ calculations (BIS Quarterly Review, March 2016).*

### Conclusions

### Conclusions

### Implementation and transmission of negative policy rates
- The introduction of moderately negative policy rates by the four central banks under review was "by and large achieved within their existing operational frameworks."
- Modestly negative policy rates are transmitted through to money market rates "in much the same way as positive rates."
- They "appear" to be transmitted to longer-maturity and higher-risk rates, although this assessment "is clouded by the impact of complementary monetary policy measures."
- Retail deposit rates have "remained insulated, partly by design."
- In Switzerland, negative rates have "actually raised, rather than lowered, mortgage rates."

### Limits, uncertainty and scope
- "Zero has not proved to be a technically binding lower limit for central bank policy rates."
- There is "great uncertainty" about the behaviour of individuals and institutions if rates were to decline further into negative territory or remain negative for a prolonged period.
- It is unknown whether the transmission mechanisms will continue to operate as in the past and not be subject to "tipping points."
- An extended period of negative interest rates has so far been limited to the euro area and neighbouring economies; "It is not clear how negative policy rates would play out in other institutional settings."

### Banknotes and coins in circulation
- The special feature includes discussion and a graph on banknotes and coins in circulation (Graph 5), with sources: European Central Bank; Datastream. (Graph labels include series for Euro area, Sweden, Switzerland, Denmark.)

### Financial system effects and open questions
- The special feature examined "exclusively the technical aspects of the implementation of negative policy rates" and did not address the question of the impact of negative policy rates on the financial system as a whole.
- Many questions remain, including:
  - The "debilitating impact of persistently negative interest rates on the profitability of the banking sector" has emerged as an important consideration (BIS (2016)).
  - Negative rates can weaken the profitability and/or soundness of institutions with long-duration liabilities, such as insurance companies and pension funds, "seriously challenging their business models."
- An assessment of the desirability of negative policy rates would require:
  - An evaluation of their effectiveness in achieving central bank objectives.
  - An evaluation of their more general impact on financial and macroeconomic stability.
- These broader assessments are "beyond the scope of this special feature."

*BIS Quarterly Review, March 2016 — Conclusions*

---


_Source: http://www.bis.org/publ/qtrpdf/r_qt1603e.pdf_