December 6, 2019
Back in late August of this year, the aggregate amount of negative yielding debt across the globe surpassed $17 trillion, which represented a quarter of all investment grade debt. Prior to the financial crisis, negative yielding debt was just a theory as it was believed that no rational investor would pay a borrower to utilize their funds and guarantee a loss. However, Europe’s struggle to recover from its double dip recession prompted the ECB to push deposit rates below zero. The idea behind negative rates was to encourage investment by disincentivizing banks from parking their funds at the ECB. Banks would instead lend the funds which would facilitate economic expansion and ward off the threat of deflation. However, negative rates drove down returns on loans and many banks elected not to pass negative rates along to their depositors for fear of deposit runoff, which compressed net interest margins and weighed on bank profitability and their ability to extend credit.
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