If the interest rates earned by banks on all their assets fell close to zero, why bank customers have to pay interest fee on deposits they hold with banks? Concept introduction: Normally savers earn interest when they deposit their money in banks. Similarly, commercial banks that lodge money with central banks receive interest for doing so. Negative interest rates turn this arrangement on its head. Savers have to pay banks for holding their money and central banks penalise banks for depositing cash with them. The idea is that negative interest rates provide banks with an incentive to lend money rather than to hoard it. The same would apply to members of the public, who would be encouraged to spend rather than save.

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Chapter 15, Problem cFCT

To determine

If the interest rates earned by banks on all their assets fell close to zero, why bank customers have to pay interest fee on deposits they hold with banks?

Concept introduction:

Normally savers earn interest when they deposit their money in banks. Similarly, commercial banks that lodge money with central banks receive interest for doing so. Negative interest rates turn this arrangement on its head. Savers have to pay banks for holding their money and central banks penalise banks for depositing cash with them. The idea is that negative interest rates provide banks with an incentive to lend money rather than to hoard it. The same would apply to members of the public, who would be encouraged to spend rather than save.

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