Two Banks Charging Negative Nominal Interest Rates For Holders of Swiss Francs and Danish Krone

State Street Corp. and Bank of New York Mellon have both announced that customers who want to hold Swiss Francs or Danish Krone will have to subject themselves to a negative nominal interest rate for the privilege. The impossibility of such a thing occurring in a world with physical currency is a staple stylized fact of monetary policy debates, but the banks are betting that large institutions will be willing to pay a penalty for the safety and convenience of bank accounts rather than trying to hold huge quantities of Danish cash in a self-storage unit.

The broader context is that the ongoing troubles in the eurozone have led many investors to the clever conclusion that it would be safer to stash their “European” investments in Danish or Swiss money. Those countries are very tied in to the prosperous Northern European economic zone but aren’t part of the eurozone. But Denmark maintains a currency peg with the euro as a matter of formal policy, and the Swiss National Bank has announced a ceiling on how much the franc will be allowed to appreciate relative to the euro. At the intersection of that strong investor demand for the money and central banks’ unwillingness to let the value of the currency rise comes the sharp interest rate squeeze that the banks in question are now addressing. Raising krone-denominated deposits at a positive interest rate just isn’t a money-making venture at this point.

It’s a small interesting example of how the “zero lower bound” doesn’t really bind in practice, but also of the fact that small countries get an edge on monetary policy because people are relatively comfortable using exchange rates as an instrument for unorthodox moves.