# What if: Negative interest on an overdrawn bank account?

Theoretical question:

Consider if a bank account had a -12% yearly interest rate, and an account was currently overdrawn to a balance of -$100. What would the bank do to the -$100 balance after one month's -1% is applied?

• It may not belong to here, but is an interesting question. I would like to know what answers we can have. Jun 2 '16 at 17:08
• I promise I'm not exploring an alternate plot line for Richard Pryor in Super 3 (or Office Space)... but no telling where your opinions might lead. Thanks. Jun 2 '16 at 22:30
• I just called up my banker, and he was baffled. He suggested that in the case of an overpaid credit card, the APR won't apply to the balance, so in an overdrawn checking account, maybe the bank wouldn't apply the negative interest rate. Jun 3 '16 at 14:08
• Exactly. The bank will find a reason not to apply it. Jun 3 '16 at 20:20
• I figure the bank isn't going to lose out on this, but I also assumed that the bank would plunge the account further into debt (ex: -$100, -$101, ...). For instance, if an account is overdrawn, I'm sure they'd keep charging fees. The real answer to my question may be that "there's no way to apply ANY interest rate on a negative balance". Jun 3 '16 at 23:51

If you owe money to the bank, you will not receive a compensation.

It might not exactly correspond to what you want, but here is my understanding.

If we refer to the origin of the rates formation, you see two rates.

### the marginal lending rate

this one cannot be negative, ECB will not pay a bank which is out of cash.

### the deposit facility rate

this one can be negative, it means that if a bank A doesnot want to invest in any other assets and prefer keeps money on their central bank account,

sometimes bank A will prefer to pay a fee rather than invest in some liquidity because of cash needs.

### a bank won't pay you if your bank account is negative because it misses an opportunity

if you have $$-100$$€ on your bank A account, then the bank A is missing $$100$$€ on its balance sheet and must borrow money from the central bank, it will apply you the marginal lending rate (+fee),

of course, you can pretend that you offer a service to the bank by reducing its extra cash that bank must deposit (at a cost) to the central bank, but remember that bank A would prefer to invest extracash in other assets.

My understanding is that negative rates are a way to penalize cash not invested in assets.

• I think you're right on the bank motivations. I am losing you a bit where it looks like you got cut off "[..] will pay a fee rather than being". If you have time, a read through and an edit would probably clear it all up. Jun 9 '16 at 20:00
• tell me if it is more clear, I can try to go more into details if you really want to Jun 10 '16 at 14:03
• Ok, so my key take away is that a negative balance is effectively a loan and thus a borrowing rate or fee would apply... and that interest rates apply to positive balances (ie: cash in your account). Aug 15 '16 at 1:27
• Yes. You got the point. Negative balance on your bank account is like a loan from the bank to you. Positive balance is like a loan from you to the bank. Aug 15 '16 at 12:23