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European Banks Did Not See Negative Interest Rates Coming

Those things came out of nowhere.
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Pioneers of new, highly unprofitable business.

Remember back when the real-estate bubble burst and all sorts of people both in the U.S. and in Europe got kicked out of houses that weren’t worth anything anymore in no small part because they took out mortgages that they didn’t understand and probably should never have been sold to them in the first place, and there was misery and hardship and high-minded squatting in all the land? Well, it turns out, if you managed not to default on your mortgage and stay in your house, some very small number of you in Europe just might have the last laugh after all, because no one thought to put in some small print that said, “interest rates not to fall below 0%.”

Banks set interest rates on many loans as a small percentage above or below a benchmark such as Euribor. As rates have declined, sometimes to below zero, some banks have faced the paradox of paying interest to those who have borrowed money from them….

“I’m going to frame my bank statement, which shows that Bankinter is paying me interest on my mortgage,” said a customer who lives in Madrid. “That’s financial history.”

In that particular case, it all goes back—as it must—to the Swiss National Bank and the much-lamented end of its franc-euro exchange cap. Because that particular Madrileño’s mortgage is denominated in francs and linked to the franc Libor and the franc Libor is lower than low right now, said Madrileño is getting paid to have a mortgage. But he or she has just as much reason as Bankinter to hate the hell out of SNB chief Thomas Jordan, since his or her mortgage principal is now 15% or so more than it used to be.

It is hardly a windfall for this customer, however, because, while Swiss franc Libor has fallen, the Swiss franc itself has risen in value against the euro. That means the value in euros of the total mortgage debt he owes Bankinter has also increased, because that debt is denominated in Swiss francs.

Tumbling Interest Rates in Europe Leaves Some Banks Owing Money on Loans to Borrowers [WSJ]


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