The Defenders of Cash

Jens Weidmann is taking on the ECB over limits on cash.
  • Why it matters

    Why it matters

    Eliminating cash might help to curb criminal and terrorist activity, but it could also throw up a hurdle for consumers to spend.

  • Facts


    • Negative interest rates increase the demand for large bills, because bank customers eventually choose to keep their money in cash rather than paying negative interest to park their money at a central bank.
    • Member of the ECB governing council are investigating ways to phase out the €500 bill.
    • Bundesbank President Weidmann argues that creating an expiration date for the €500 billion would destroy confidence in the banknotes.
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Once again, Jens Weidmann has taken a stand against his peers at the European Central Bank. This time it’s over the future of cash.

At a press conference in Frankfurt on Wednesday, Jens Weidmann, the president of the Bundesbank, had intended to focus on the profits of Germany’s central bank, which had increased slightly to just under €3.2 billion ($3.53 billion) in 2015. The increase was mainly attributable to a reduction in reserves set aside for financial risks.

But the Bundesbank’s own finances quickly faded into the background when he was asked his thoughts on the European Central Bank’s plans to phase out €500 bills. Mr. Weidmann, who has loudly protested many of the ECB’s aggressive efforts to bolster the euro zone over the last few years, left no doubt about where he stood on cash, too.

It has proven an extremely emotional issue in Germany over the last few weeks – ever since Deutsche Bank’s chief executive, John Cryan, predicted the death of cash in a decade and news emerged that politicians are considering limiting cash transactions. For many households in Europe’s largest economy, which still relies more on cash for daily purchases than any other E.U. country, the debate has been about fundamental freedoms.

Few people are calling for a complete end to bills and coins. Still, many policymakers see upper limits on cash payments or eliminating the €500 bill as a first step in that direction. The European Central Bank last week acknowledged it is considering phasing out the €500 bill across the 19-nation euro zone.

The push to limit cash has in part to do with the difficult economic situation worldwide, Mr. Weidmann said, which has encouraged experts to start thinking about how to create more leeway for monetary policy.

But Mr. Weidmann warned this could send the wrong message: “It would be fatal if the public received the impression that the goal is to abolish cash.”

“It is doubtful whether terrorists and criminals will be prevented from engaging in illegal activity because there is an upper limit or large denominations are abolished.”

Jens Weidmann, Bundesbank President

Cash creates a natural lower limit for interest. When bank customers are forced to pay negative interest on their deposits, it eventually becomes more attractive for them to simply keep their money in cash. However, if cash were abolished and funds were kept exclusively at banks, interest could be reduced more substantially. In Japan and Switzerland – countries with negative interest rates – the demand for large bills has already increased.

The debate over monetary policy must be kept separate from the argument that eliminating the €500 bill or imposing limits on cash transactions could help curb criminal activities, said Mr. Weidmann.

“The goal pursued with these measures is worth supporting,” he said. “However, it is doubtful whether terrorists and criminals will be prevented from engaging in illegal activity because there is an upper limit or large denominations are abolished.”

Many of his colleagues in the European Central Bank’s governing council disagree. In early February, they decided that the central bank’s banknote committee should investigate the technical details of abolishing the €500 bill. One option involves imposing an expiration date, after which the €500 bill would no longer be accepted. Alternatively, the European Central Bank could simply stop printing the bills.

Mr. Weidmann made his position very clear. “The goal is to safeguard confidence in the banknotes.” An expiration date, he said, “would have the potential to destroy this confidence.”

Not everyone in Germany is quite as worried about the effect of losing the €500 note as Mr. Weidmann. Germany’s finance minister, Wolfgang Schäuble, admitted this week that he didn’t even the note existed until the debate began last month.

“That tells you something about how well German finance ministers are paid,” he quipped during a podium debate on the sidelines of the G20 meeting in Shanghai, according to WirtschaftsWoche, a sister publication of Handelsblatt.

Limiting high bank notes was legitimate to combat money laundering, he said, but Germany would never countenance the end of cash altogether.

“Nobody wants to abolish cash,” Mr. Schäuble said.




The challenging economic environment and low interest rates play a role in the cash debate, but they also affect the Bundesbank’s profits. Its interest income in 2015, €2.3 billion, was the lowest it had been since the monetary union was formed at the turn of the millennium. The only reason profits increased is that the Bundesbank reduced the provisions it has set aside for financial risks by €800 million, to €13.6 billion.

From 2009 to 2012, the Bundesbank gradually increased its risk provisioning from €1.9 to its highest level of €14.4 billion, the main reason being to avert possible losses in connection with an  ECB plan to purchase bonds at the height of Europe’s debt crisis. The euro zone’s central banks had used a program known as the SMP to buy the bonds of individual euro countries, such as Italy and Greece, between May 2010 and September 2012. These bonds are gradually maturing.

The SMP program is separate from the ECB’s €1 trillion bond buying program, known as quantitative easing. In the current bond-buying plan, which involves purchasing bonds across the entire 19-nation euro zone, the central banks are largely liable for the bonds from their own countries.

Ironically, the Bundesbank is now earning large amounts of its interest with the bonds from the original SMP program: €1.7 billion in 2015 and more than €2 billion in 2014.

The Bundesbank has also profited financially from ECB”s decision to charge banks a fee for parking their money at the central bank overnight. The “negative interest rate” on deposits earned the Bundesbank about €250 million in 2015.

Mr. Weidmann doesn’t want to be measured by profits, however, especially since he has long argued that many of the ECB’s aggressive policies carry risks for the wider financial system.

A central bank can always make profits with its unlimited firing power, Mr. Weidmann noted. “Making profits is not our objective.”


Jan Mallien covers the European Central Bank, the Bundesbank and monetary policy for Handelsblatt in Frankfurt. Christopher Cermak of Handelsblatt Global Edition contributed to this story. To contact the author: mallien@handelsblatt.com 

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