When policymakers at the European Central Bank meet next week to debate the prospect of a fresh economic stimulus package, one of the key issues on the table will be whether their own measures are doing more harm than good.
The era of unprecedented monetary policy loosening that Mario Draghi launched in 2012 when he declared that he would do "whatever it takes" to support the single currency heralded a shift towards negative interest rates.
The ECB's main deposit rate hit zero that year and successive cuts have left it at -0.4 per cent since 2016.
But as the ECB prepares to debate cutting rates further, questions are growing about whether the downsides outweigh the positive effects.
Critics say that negative rates weaken the eurozone's already struggling banking system, discouraging lending and motivating insurers, banks and savers to hoard physical cash.
Volker Hofmann at the Association of German Banks said eurozone lenders pay €7.5 billion ($12.9b) a year in negative rates on the excess deposits they hold at the ECB, adding: "It is a remarkable burden for banks who find it more or less impossible to convey this cost to retail savers."
Banks are the main source of finance for European companies and households, making them an important transmission mechanism for monetary policy. But many banks' shares are trading below their book value and their return on equity remains below their cost of capital in most cases, underlining how the sector has struggled to recover from the financial crisis.
The debate about negative rates hinges on the idea of a reversal point below which further cuts in a central bank's deposit rate subdue lending activity by banks. Research published last month by economists from the US Treasury department, the University of Bath, the University of Sharjah and Bangor University found "robust" evidence that bank lending growth was weaker in countries with negative rates.
The impact was greatest on banks funded mainly by retail deposits, they said.
Damien Venuto: Payday lenders, vapers, a new ad shop and an ugly anniversary
A recession isn't inevitable: The case for economic optimism
It has become more common for European banks to charge fees for current accounts, but they only mitigate a fraction of the extra cost of negative rates.
Jean Pierre Mustier, chief executive of Italy's UniCredit and chairman of the European Banking Federation, said: "In such an environment it is important that European banks are not put at a competitive disadvantage in terms of ability to attract capital because their profitability might be structurally lower than others, namely the US."
Olaf Scholz, Germany's finance minister, said recently that he would examine whether it was possible to protect savers by banning banks from passing on the cost of what he called the ECB's "penalty rates".
Draghi has always insisted that while some policies may have negative side-effects, the overall impact of its radical policy loosening has been beneficial.
Bank lending to households in the eurozone has increased more than 10 per cent since the ECB first cut into negative territory in June 2014, while corporate lending has grown by almost 4 per cent. Philip Lane, the ECB's new chief economist, said in a recent speech that without the central bank's efforts both growth and inflation would have been significantly lower.
Christine Lagarde, who is set to succeed Draghi at the helm of the ECB, last week said that "while I do not believe that the ECB has hit the effective lower bound on policy rates, it is clear that low rates have implications for the banking sector and financial stability more generally".
The ECB should "closely monitor whether adverse side effects may emerge in the future, the longer low interest rates are in place", she added.
As well as discussing whether to cut rates again, the ECB's governing board will next week also consider whether to mitigate the impact on banks.
One option is a tiering system in which a portion of banks' excess deposits are exempt from negative rates. Other countries with negative deposit rates, including Switzerland, Denmark and Japan, have similar systems.
And the ECB has another option: subsidised lending.
This spring it announced a third programme of subsidised loans that is set to launch later this month. The targeted longer-term refinancing operation (TLTRO) will lend at a slightly more expensive rate than the two previous programmes, but the ECB could choose next week to sweeten the terms.
There is a geographical difference between the effects that these two mitigating measures have across Europe. Tiering is likely to provide more relief to German, French and Dutch banks, which hold more excess deposits; cheap loans help southern European banks, which have higher funding costs.
Even if it launches these mitigation measures, some analysts believe the ECB is rapidly approaching the point at which the economics shift in favour of hoarding cash.
Klaus Wiener, chief economist at the German Insurance Association, said one insurer had recently been quoted a price for storing its cash of 0.2 per cent of its value, including insurance — half the cost of the ECB's deposit rate.
There is some evidence that hoarding has already started. The amount of physical cash held in vaults and safes has swelled 57 per cent to €81.5b since negative rates were introduced five years ago, ECB data shows — though that remains tiny compared to the over €6 trillion in eurozone bank deposits.
Wiener said that several insurers had already drawn up plans to store more excess cash in vaults from next month.
"There is a case for insurers having some money in vaults if negative rates do become more negative and banks pass these costs on to customers," he said.
Written by: Martin Arnold
© Financial Times