THE idea of keeping piles of cash in high-security vaults across Europe may sound like something out of an old film plot, but some banks and insurers have recently started considering the idea as interest rates sink below zero across much of Europe.

The continent’s highways are not yet jammed with guarded trucks transporting money to top-secret locations, but if it becomes financially sensible for banks to hoard cash as rates are cut even further, the practice could undermine central banks’ ability to use negative rates to boost growth.

After the European Central Bank’s most recent rate cut in March, private-sector banks are paying what amounts to an annual levy of 0.4pc on most of the funds they keep at the eurozone’s 19 national central banks. This policy, which has cost banks around 2.64bn euros since ECB rates became negative in 2014, is intended to spark growth by incentivising banks to lend money to businesses instead of holding on to it.

There is also the issue of whether private sector banks would be able to hoard cash on a large scale without the tacit approval of their national central banks

European central bankers say they could cut rates again should conditions worsen, but private bankers and insurers are already thinking of creative ways to avoid those charges altogether.

One way is by turning the electronic money they keep at central banks into cold, hard cash. Munich Re has experimented successfully with storing a double-digit million sum of euros in cash at what the insurer describes as a manageable cost.

A few other German banks, including Commerzbank, the country’s second-biggest, have also considered the move. But when a Swiss pension fund attempted to withdraw a large sum of money from its bank in order to store it in a vault, the bank refused to provide the cash, according to media reports.

If this practice becomes widespread, it would have big economic implications. If banks are not paying central bank interest charges, then they will not be as affected by further official interest rate cuts. They therefore will not be spurred to lend out more money.

But fortunately for central banks, the hoarding of cash creates other costs.

The expense of storage and transportis not the biggest problem. A withdrawal of a large amount of cash in one swoop would keep transport costs low, while the high value of the largest denominations of euro and Swiss franc notes means that large amounts can be stored in small volumes.

Even when the ECB stops issuing the 500-euro note in 2018 and banks will have to use 200-euro notes, there is enough space in vaults, according to private bankers.

Bank robbers, earthquakes and other unforeseen disasters, on the other hand, are a problem. They raise the delicate issue of finding an insurer willing to take on those risks for a reasonable fee.

“No one stores cash for large amounts of time. At the moment, cash comes in and then goes out quickly to ATMs,” says a German banker, who has looked into the costs of switching to banknotes. The banker estimates that the insurance cost would probably be between 0.5-1pc of the value of the banknotes being stored. That would be higher than the ECB’s negative rate, but in line with Switzerland’s minus 0.75pc, which is one of the lowest.

There is also the issue of whether private sector banks would be able to hoard cash on a large scale without the tacit approval of their national central banks. If a eurozone bank wanted to switch its reserves into banknotes, the first step is to contact the national central bank at which its account is held.

Each of the national central banks must agree to swap the electronic money for banknotes in the denominations chosen by the bank. If a number of banks decided to hoard cash, the amount of banknotes in circulation would jump. At the moment, there are euro notes worth 1.087tn euros in circulation. Banks have almost the same amount (988.1bn euros) that they could demand from the central bank.

The national central banks stockpile banknotes, and the ECB has measures in place to supply them on short notice if demand soars. The ECB says: “Rest assured that the ECB and the Eurosystem will continue to make all necessary arrangements to ensure a smooth functioning of cash as a means of payment and a store of value.”

The German banker says it is unlikely that cash hoarding would become a widespread practice. Rather, it is a good way of registering banks’ protest.

“It would be sensible for two or three banks . . . to make clear that there is a lower bound for interest rates,” he explains. “I don’t think the Swiss National Bank will be able to cut rates again without insurers and banks trying to hoard cash. [Hoarding cash] is in nobody’s interests. It would cost banks a lot and would clearly mean that central banks can’t really do anything to lower interest rates at the moment. Every side wants to avoid it.”

Published in Dawn, Business & Finance weekly, August 22nd, 2016