How Negative Rates Affect Overdrawn Bank Accounts
Summary
The document considers whether a bank would apply a negative interest rate to reduce a customer’s overdraft. Its answer distinguishes the central bank’s deposit facility rate from its marginal lending rate: negative deposit rates may charge banks for holding funds, while the lending rate applies when a bank needs to borrow liquidity. The proposed explanation is that an overdraft leaves the bank short of funds, so the bank is more likely to charge the customer for borrowing than to pay them interest.
This is a conceptual explanation rather than a contractual or jurisdiction-specific rule. It does not calculate the balance after a month or establish how any particular bank account handles negative rates. The account agreement and applicable banking rules would determine the actual treatment. The answer also presents a simplified view of bank funding and liquidity, so it should not be read as a full model of how banks price overdrafts or manage reserves.
Key ideas
- Negative deposit facility rates can charge banks for holding funds at a central bank.
- A bank that faces a customer overdraft may need to obtain liquidity to cover the shortfall.
- The answer argues that negative policy rates do not imply that a bank pays interest on an overdrawn customer balance.
- Actual overdraft interest treatment depends on the account terms and applicable rules.
Tags
Full text
# What if: Negative interest on an overdrawn bank account? # What if: Negative interest on an overdrawn bank account? Theoretical question: Consider if a bank account had a -12% yearly interest rate, and an account was currently overdrawn to a balance of -$100. What would the bank do to the -$100 balance after one month's -1% is applied? ## Answer by M. Jeunesse (score 3, accepted) https://quant.stackexchange.com/a/27492 If you owe money to the bank, you will not receive a compensation. It might not exactly correspond to what you want, but here is my understanding. If we refer to the origin of the rates formation, you see two rates. e.g : https://www.ecb.europa.eu/mopo/implement/sf/html/index.en.html #### the marginal lending rate this one cannot be negative, ECB will not pay a bank which is out of cash. #### the deposit facility rate this one can be negative, it means that if a bank A doesnot want to invest in any other assets and prefer keeps money on their central bank account, sometimes bank A will prefer to pay a fee rather than invest in some liquidity because of cash needs. #### a bank won't pay you if your bank account is negative because it misses an opportunity if you have $-100$€ on your bank A account, then the bank A is missing $100$€ on its balance sheet and must borrow money from the central bank, it will apply you the marginal lending rate (+fee), of course, you can pretend that you offer a service to the bank by reducing its extra cash that bank must deposit (at a cost) to the central bank, but remember that bank A would prefer to invest extracash in other assets. My understanding is that negative rates are a way to penalize cash not invested in assets.
Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.