This days I had a client meeting in which the only topic was how we can prevent negative interest rates for the firms Cash reserves.
Yes, you read correctly negative interest rates for cash or bank accounts. People from Switzerland probably made already their personal experience with it. But for people for the European Union or other parts in the world did not, so far.
The situation is simple the interest rates are set on an all times low form the European Central Bank, currently at zero. This is not the one key-element for the current situation, the second is the rate for overnight money which mostly banks have to hold at the ECB-accounts. This rate is at 0.40%, in Switzerland it is 0.75%. Third element is the time from which we are in this period, also for how long we will have it too.
All three elements raised the pressure on the banks income so far that they lowered the interest rates for savings to zero, then came the negative interest rates for high volumes on cash accounts and by time the limit of volume felled for which negative rates would be charged. Currently this amount in Germany is between the from all above 1 Mio. Euro to from the first Euro on your account.
This is in short terms the current situation.
A very interesting situation, especially because we did not have this ever before. Inflation, switches in currencies or loses from investments we know or experienced by ourselves. But negative interest rates? No, this is a new chapter in a history book.
Obvious answer would be change your bank, to one which does not charge a fee for handling your cash account. This could be a working solution if that scenario would apply just for a couple of banks, but it is not one if almost all of them work with the same system. To spend all could also not be the solution.
First step should be an evaluation of the cash reserves, income and outcome streams and investment. This will provide us with basic information to answer question such as, which capital reserves will be required to provide enough liquidity for payments. Also we will be aware of future incomes and when they will be expected to meet again outcomes. Under the line we will see then also where and when we will have more liquidity then required or when it could be to less.
Liquidity comes always before rentability and it is the essential number one for life of every company and financial life of a person.
After we are aware of the liquidity as also about when we have more then required or to less. Then we can turn to the investments, question should be here when do we expect here returns or do we have to provide some cash. Second question could be, if we have the liquidity which will be not needed where we have the investment opportunities.
If we identified high cash reserves which will be not needed and investment opportunities, we will have to take the time for a deep due diligence of any final investment.
Now when we identified your cash position and probable investments for not required liquidity, it stays the question how could be negative interest rates be defended for the necessary required cash.
Here it starts to get difficult, because the answer for this questions strongly depends on your requirements.
The answer should start with another question what will be influenced by the negative rates and in which asset class will be it found. Obviously it is found in the asset class of cash, but also any cash related asset or asset classes which include cash positions, such as investment funds. Also it can be found for example in currencies from countries with low or negative interest rates, for example Switzerland.
This question will be followed by the flexibility or accessibility. Here counts as usually as less flexible and accessible something is as higher the return or in this topic as lower the negative rate will be. We answered that one almost, because we eliminated the mid and long term perspective. At this point we are mostly speaking about timeframe of up to two years or less then one. Also with the view on the accessibility we will have all from daily accessible up to accessible at the point of return.
Summarised if you are in position where you need a short or daily accessible secure cash reserve, we will be in the situation in which we will not asking for the highest return, but just to prevent any kind of negative interest rates. Because they will be mostly found in saving accounts or deposits. What could be an alternative if this cash investments dry out. Alternatives can be for example in first line cash in form of notes, see for example what the insurer Müncher Rück did. Second possibility would be to split your accounts over several banks since we have the volume limits which will be free of any negative interests. This I would recommend besides the fact of protection against negative interest rates anyway, to have a second bank on board is always a good idea.
More sufficient alternatives would be short term investment funds, investing for example in investment grade short term bonds. Of course no expectations should be taken to get any return on investment, idea is to have a from of vehicle to park a sum from the cash reserve. Also this form is independent from any bank, could be interesting in this days.
Next probable vehicle could be any from of currency. In currencies can be invested in the from of buying notes, currency accounts or bonds in another currency. Foreign stocks could be also considered, just the risk is higher. Important in the last both forms are to have a currency account through which the investment will be bought and when it gets sold returns on it, if not your investment comes back on your own currency.
A last possibility alternative can be also any form of metal, for example gold or silver. Also here we will have to take the risk of price changes during the investment.
Important is in any case liquidity stands over any rentability also over the negative interest rates. Also the question of accessibility is important, how can you access your investment and during which time you have it back.
My recommendation is to consider a mix of some of the described alternatives.
Yes, you read correctly negative interest rates for cash or bank accounts. People from Switzerland probably made already their personal experience with it. But for people for the European Union or other parts in the world did not, so far.
The situation is simple the interest rates are set on an all times low form the European Central Bank, currently at zero. This is not the one key-element for the current situation, the second is the rate for overnight money which mostly banks have to hold at the ECB-accounts. This rate is at 0.40%, in Switzerland it is 0.75%. Third element is the time from which we are in this period, also for how long we will have it too.
All three elements raised the pressure on the banks income so far that they lowered the interest rates for savings to zero, then came the negative interest rates for high volumes on cash accounts and by time the limit of volume felled for which negative rates would be charged. Currently this amount in Germany is between the from all above 1 Mio. Euro to from the first Euro on your account.
This is in short terms the current situation.
A very interesting situation, especially because we did not have this ever before. Inflation, switches in currencies or loses from investments we know or experienced by ourselves. But negative interest rates? No, this is a new chapter in a history book.
Obvious answer would be change your bank, to one which does not charge a fee for handling your cash account. This could be a working solution if that scenario would apply just for a couple of banks, but it is not one if almost all of them work with the same system. To spend all could also not be the solution.
First step should be an evaluation of the cash reserves, income and outcome streams and investment. This will provide us with basic information to answer question such as, which capital reserves will be required to provide enough liquidity for payments. Also we will be aware of future incomes and when they will be expected to meet again outcomes. Under the line we will see then also where and when we will have more liquidity then required or when it could be to less.
Liquidity comes always before rentability and it is the essential number one for life of every company and financial life of a person.
After we are aware of the liquidity as also about when we have more then required or to less. Then we can turn to the investments, question should be here when do we expect here returns or do we have to provide some cash. Second question could be, if we have the liquidity which will be not needed where we have the investment opportunities.
If we identified high cash reserves which will be not needed and investment opportunities, we will have to take the time for a deep due diligence of any final investment.
Now when we identified your cash position and probable investments for not required liquidity, it stays the question how could be negative interest rates be defended for the necessary required cash.
Here it starts to get difficult, because the answer for this questions strongly depends on your requirements.
The answer should start with another question what will be influenced by the negative rates and in which asset class will be it found. Obviously it is found in the asset class of cash, but also any cash related asset or asset classes which include cash positions, such as investment funds. Also it can be found for example in currencies from countries with low or negative interest rates, for example Switzerland.
This question will be followed by the flexibility or accessibility. Here counts as usually as less flexible and accessible something is as higher the return or in this topic as lower the negative rate will be. We answered that one almost, because we eliminated the mid and long term perspective. At this point we are mostly speaking about timeframe of up to two years or less then one. Also with the view on the accessibility we will have all from daily accessible up to accessible at the point of return.
Summarised if you are in position where you need a short or daily accessible secure cash reserve, we will be in the situation in which we will not asking for the highest return, but just to prevent any kind of negative interest rates. Because they will be mostly found in saving accounts or deposits. What could be an alternative if this cash investments dry out. Alternatives can be for example in first line cash in form of notes, see for example what the insurer Müncher Rück did. Second possibility would be to split your accounts over several banks since we have the volume limits which will be free of any negative interests. This I would recommend besides the fact of protection against negative interest rates anyway, to have a second bank on board is always a good idea.
More sufficient alternatives would be short term investment funds, investing for example in investment grade short term bonds. Of course no expectations should be taken to get any return on investment, idea is to have a from of vehicle to park a sum from the cash reserve. Also this form is independent from any bank, could be interesting in this days.
Next probable vehicle could be any from of currency. In currencies can be invested in the from of buying notes, currency accounts or bonds in another currency. Foreign stocks could be also considered, just the risk is higher. Important in the last both forms are to have a currency account through which the investment will be bought and when it gets sold returns on it, if not your investment comes back on your own currency.
A last possibility alternative can be also any form of metal, for example gold or silver. Also here we will have to take the risk of price changes during the investment.
Important is in any case liquidity stands over any rentability also over the negative interest rates. Also the question of accessibility is important, how can you access your investment and during which time you have it back.
My recommendation is to consider a mix of some of the described alternatives.
