How a negative rate made idle cash costly
When Sweden’s central bank, the Riksbank, set a negative rate on banks’ overnight deposits in 2009, it reversed a familiar bargain. Instead of earning interest for leaving money at the central bank, a bank paid a small amount to keep certain funds there. The charge applied to banks’ balances in the central bank’s deposit facility—not to every account a bank held or to customers’ savings directly.
The aim was to make parking cash less attractive during a downturn. If banks could earn little or nothing by holding funds overnight, they might look harder for other uses, including lending to businesses and households. Lower borrowing costs could also encourage customers to spend or invest rather than wait.
Why a penalty could not guarantee more loans
A bank does not lend simply because it has cash available. It also weighs whether borrowers are likely to repay, how much capital it must hold against a loan, and whether it needs funds for payments and other obligations. In a crisis, weak demand and uncertainty can make lending look risky even when the cost of holding reserves rises.
Nor can the banking system make central-bank reserves disappear through lending: a loan creates a deposit for the borrower, while reserves are transferred between banks as payments move. The rate’s influence is indirect. It changes the price of holding certain balances and helps shape broader borrowing costs and expectations; it does not mechanically turn reserves into loans.
A small rate with a wider signal
The 2009 move was an experiment in pushing monetary policy below zero while Sweden faced the effects of the global financial crisis. Its importance was not that a charge could compel banks to lend, but that central banks had another way to discourage cash hoarding when ordinary rate cuts had little room left. The practical test was whether cheaper credit and a nudge away from idle balances could support spending without making banks’ caution disappear.
