Although the banks operate in a completely technological manner, their information systems are systems that have evolved over the years, and each time a different segment has been replaced by a more advanced and up-to-date component. To date, the banking systems have never been required to deal with negative interest rates, so there is concern that there may be components that will create anomalies.
The appeal then came to the banks after a difficulty that the Bank of Israel experienced in the strengthening of the shekel relative to currencies in the world, as well as the lack of inflation in the economy. All this 7 years after the subprime crisis.
The dollar then stood at around 3.6, and in any case has not fallen since the subprime crisis below the level of 3.4.
The response of the banking system, as published in the economic press, then, was that the banking system was not prepared to deal with a negative interest rate. When the intention was to prepare a car for the treatment of negative interest rates. The concern in the banking system was because of a ‘malfunction’, a bug that would disrupt the calculations of interest rates in the banking systems, since these systems never dealt with a negative interest rate.
Another concern was the losses of customers on the accounts of the doer and the deposits, and what to do with these losses, will they roll this over to the accounts of the customers, perhaps only to the institutional customers, or will the Bank of Israel assist in this?
All of these, then, raised in 2015 not-so-simple questions. But, since at the same time, it is estimated that even if a negative interest rate is charged for a few months, the response of the banking system was mainly – if a negative interest rate is charged for a few months anyway, then the question arises whether it pays to maintain all this significant preparation. Several months of activity.
So, at the time, there was a possibility that the Bank of Israel was persuaded to deepen activity in other channels, and not to introduce a negative interest rate. As stated, Bank of Israel also apparently thought that the length of time that a negative interest rate would be practiced would not be high, and therefore, it is not certain that the big hassle would pay off for everyone.
Today, with the corona crisis, with monetary expansions around the world, and with the scope of actions taken by all central banks around the world, the question arises as to whether the Bank of Israel does not use the additional tool it has – negative interest rates.
The Bank of Israel is making great efforts during the corona period
We will begin the discussion on what the Bank of Israel does. Currently, the Bank of Israel operates on 3 fronts.
First front – acquisitions in the secondary market – Government bonds. The Bank of Israel recently announced that it is increasing the volume of government bond purchases in the secondary market to NIS 35 billion. Since government bond yields are the benchmark for all bond yields in the market, and in light of liquidity difficulties in the markets, the Bank of Israel actually functions as a ‘strong player’ in the market, and makes purchases in the secondary market, with the aim of raising bond prices. Inject more liquidity into the market. The Bank of Israel has so far purchased about NIS 46 billion in government bonds, meaning that the Bank of Israel finances the government debt by purchasing government bonds in the secondary market, thus preventing the rise in government debt.
In addition, the Bank of Israel also makes purchases of corporate bonds in the secondary market, so far the volume of purchases has reached NIS 3.5 billion.
A second front is the provision of long-term loans to the banking system, The loans are at an interest rate of minus 0.1% and for a period of 4 years. These loans are against loans that the banks actually put up for small and medium-sized businesses, at a price of Prime + 1.3% (which means up to 2.9%). According to the latest report from the Bank of Israel, loans of almost NIS 20 billion were made in this way.
A third front, is the non-banking entitiesThe Bank of Israel operates programs to deal with the liquidity difficulties of credit card companies and non-bank credit institutions. In this context, the Bank of Israel will actually purchase tradable collateral – government bond, makam, and corporate bond (by certain criteria), and subject to providing credit to small and small businesses at an interest rate of up to Prime + 1.3%, the interest rate for these entities will be 0.1%. In other words, this is not a loan for the benefit of these entities, but swap transactions. The Bank of Israel provides credit with bonds as collateral. So far, the volume of these transactions has been NIS 1.5 billion.
This is supposed to provide credit to small and medium-sized businesses, lowering credit. In fact, the Bank of Israel pays a high price for the collateral provided to it by these entities, thereby increasing the means at its disposal. This expensive price, the entities will absorb from them, for credit they will allocate to small and medium-sized businesses.
In fact, both in the purchase of government bonds in the secondary market and in swap transactions, the Bank of Israel functions as a heavy player, offering a kind of “safety net” to those who need to liquidate their assets in favor of providing credit.
In other words, credit and non-bank credit institutions today find it difficult to grant new credit, since existing credit often encounters collection difficulties. In light of this, these entities need to sell liquid assets, in order to allow themselves liquidity in order to grant new credit.
Is it enough? First time
Most of the Bank of Israel’s operations come on the credit side.
In the government and corporate bond market, the Bank of Israel, in its actions, essentially promises that there will be a ‘heavy’ player in this market that will offer to purchase government bonds, which should stop the fall in these bond prices and keep bond yields high.
In swap transactions, the Bank of Israel obviates the need for these entities to enter the secondary market, sell bonds, thereby lowering the prices of these bonds, and raising the yields of these bonds, thus raising the price of the debt.
And of course in making long-term loans to the banking system, the Bank of Israel reduces credit, without being required to take the negative side of lowering interest rates even further.
As we have seen so far, all of this was not enough for the Bank of Israel, and it is also required to add another tier to the program, and to deal directly with the exchange rate. In light of this, the Bank of Israel announced an increase in the $ 2121 acquisition plan to about $ 30 billion. The dollar rate responded positively to this message, which shows the necessity of this message.
Is it enough? second time
In light of the fact that the corona crisis, as reflected in the real economy, is here to stay, when the goal of the Bank of Israel should be how no significant damage is created, damage that will take a long time to repair, if at all. For example, a low currency exchange rate will immediately bring out quite a few industrialists that will take a very long time to come back, if at all. The same goes for credit.
The difficulties that the corona is inflicting on the economy will remain long-term. So are the monetary measures of the other central banks. That is, the length of time it takes for the crisis to pass is longer. In light of this the question arises, whether it is not necessary to put the weapon of negative interest on the table.
In light of the fact that this is many months until a return to normal economic activity, and not as a temporary policy step, for a few months, this time, it seems that the difficulties of establishing a negative interest rate are lower than the benefit of this step.