German banks hoarding more cash, ECB says

The skyline with its financial district (L) and the headquarter of the European Central Bank (ECB,R) are photographed on early evening in Frankfurt, Germany, September 18, 2018. REUTERS/Kai Pfaffenbach

FRANKFURT (Reuters) - Banks in the euro zone, and in particular Germany, are hoarding increasing amounts of cash to avoid the European Central Bank’s punitive charge on excess liquidity, the ECB said in a research bulletin article on Monday.

Cash holdings by banks rose by 21 billion euros between March 2016 and the end of 2017 to 77 billion euros, with German lenders accounting for about two thirds of the increase, the ECB said.

Having lowered its deposit rate into negative territory in 2014, the ECB charges banks for parking excess liquidity, all in the hope of forcing lenders to loan the funds to the real economy to generate growth and inflation.

But once the cost of storing banknotes in vaults is less than cost of the ECB’s punitive charge, banks with excess funds tend to store more cash, testing the limits of monetary policy and creating an effective floor for ECB rates.

“This increase in vault cash has, however, remained limited,” the ECB said. “Logistical constraints such as storage

capacities or maximum amounts covered by insurance are the most likely limitations on (banks’) holding larger amounts of cash.”

“If interest rates increase some of the stored euro banknotes can be expected to return,” it added.

Reporting by Balazs Koranyi; Editing by Toby Chopra