Munich Re 1 Last week, we reported on the ECB’s decision to cut the interest rates and how Mario Draghi said ‘helicopter money’ is ‘an interesting concept that is being studied’. In the accompanying Q&A session, Draghi also said he did not expect the ECB would have to reduce the (already negative) interest rates even further which disappointed the markets. In fact, the disappointment was so big, the ECB already sent one of its members into the trenches to walk back on that statement. In an interview with the Italian newspaper La Repubblica, the ECB’s chief economist said that the ECB would not mind reducing the interest rates once again. Not only did he leave the door open for further rate cuts, he also explicitly mentioned helicopter money as an extreme but theoretical solution for the lack of liquidity on the European markets. He also said that so-called “helicopter drops” were feasible in principle, though they remain an extreme measure. “All central banks can do [helicopter drops]. You can issue currency and you distribute it to people,” he said. “The question is, if and when is it opportune to make recourse that sort of instrument which is really an extreme sort of instrument,” he added.’  This means the ECB is still willing to increase the liquidity in the Euro-system by all means, and this very likely is the first time a central bank is openly discussing helicopter money (the remark by Ben Bernanke during the Global Financial Crisis was more a tongue-in-cheek comment). On top of that, the message of negative interest rates seems to be well understood by some companies in the financial system. Munich Re, one of the largest reinsurance companies in the world, has said it will increase its cash hoard as it doesn’t want to pay a fee to the European Central Bank to store the cash there overnight. This is a first step of a problem we already warned for about two weeks ago. We said that any further reduction in the negative interest rate would have to go hand in hand with banning cash from ‘the streets’. That made a lot of sense, considering people would just start to hoard cash under their mattresses to avoid paying an annual fee to store cash on the bank, and even if people would withdraw just 10 or 15% of their savings from the banks, the entire financial system might implode. Munich Re 3 Source: Ycharts.com The simple fact Munich Re is planning to store tens of millions of euros in bank notes in its vaults might be the start signal for a very slow bank run. What’s stopping the other insurance companies, or even the bank themselves to just increase the cash position rather than keeping the deposits overnight at the European Central Bank? We also wanted to find out if the media rumors about Munich Re buying gold were true, but that doesn’t seem to be the case. The total amount of gold on the balance sheet seemed to be rather flattish compared to the previous financial year. According to our calculations, the insurer has approximately 285,000 ounces of physical gold on its balance sheet, and that’s definitely nothing to sneeze at! It’s probably one of the very few financial institutions that is somewhat transparent with regards to its gold position, but we still had to scroll all the way down to page 234 of its annual report to find the disclosed amount of gold. Munich Re 2 Source: Ycharts.com Should Munich Re decide to convert just 1/4th of its cash position on the banks to physical cash and physical gold (in a 50/50 ratio), it would have to purchase in excess of 750,000 ounces of gold. And keep in mind Munich Re is just the first mover, and other insurance companies and financial institutions might follow suit, as it’s the only practical way to avoid parking excess cash at the ECB.