Things appear to be getting worse in European banking, not better.
The European Central Bank recently cut to zero the interest rate it will pay private banks on their deposits. This leaves many money market funds with no positive investments and has forced many to close.
This is a huge problem. European banks were using their ECB accounts to hold their funds while they earned just a little interest in the process.
What’s more, this is the place where European banks put their customers’ money market deposits. Now that the interest rate is zero, there is no way to use the ECB for money market deposits and absorb the fees without making a client’s account decline in value.
In the industry, we call this “breaking the buck.” The outcome is that many European money market funds are now closing. Most recent reports suggest that more than $79 billion of the $133 billion in money funds has been shut down. That’s $79 billion that has to go somewhere, and somewhere that has low risk. Investors often choose money market or other fixed income accounts because of their low-risk nature.
Imagine this scenario occurring in the United States. What if one day money market accounts would no longer take funds? Where would you place large deposits? What would you use for cash management option?
This is the exact situation European individual and institutional investors are facing. Things appear to be getting worse in European banking, not better. Let's hope it doesn't hop across the pond.
Joe Wirbick is president of Lancaster financial services firm Sequinox. Joe specializes in retirement planning and distribution. This allows him to concentrate on developing strategies that help address the unique issues that confront retirees and those approaching retirement.
Tax advice provided for informational purposes only. Tax returns should be completed in conjunction with a qualified tax professional. Sequinox Financial and JWC/JRAG do not offer tax advice and are not affiliated. Mr. Wirbick is an investment adviser representative offering advisory services through Jonathan Roberts Advisory Group, Inc. (JRAG) and securities through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC. The opinions expressed are those of Mr. Wirbick and based on information believed to be reliable but not guaranteed and subject to change and do not necessarily reflect the position of JWC/JRAG. JWC/JRAG and Sequinox are unaffiliated independent entities.
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