How is banking and capital rationing possible in a negative interest rate environment?
Let us assume that the negative interest rate charged to the public at large on bills and savings accounts is -2% . The banks themselves would be charged a slightly lower percentage on their own funds (e.g. -1%) in order to provide them similarly with incentives not to hoard their reserves. Finally, banks would be able to lend out in a free market for housing or other creditworthy project loans at a low, but positive rate, such as +1% or +2% for instance. Therefore, banks can still have their normal spreads between the cost of funds and the market interest rates, and market rationing would still operate. The only but significant difference with the “normal” interest rate structures is that the starting point is -2% instead of for instance +8% in the United States today. 8. How would the system work in today’s modern payment systems where most transactions are not settled in cash, but in cheques or credit cards? These “modern” payment forms are in fact an advantage for the system. Indee
