One of the worst ways to get someone to do something you want is to tell them what to do. Most parents learn that lesson the hard way. The better way to incent certain behaviors is to have the other person see the benefit of exhibiting the desired behavior.

According to Dr. Charles Dwyer¹ of The Wharton School at the University of Pennsylvania, there are five steps to get someone to do what you want:

Step #1. Make sure the other person has the ability to do what you want

Step #2. Offer a reward

Step #3. Guarantee the reward

Step #4. Reduce their costs

Step #5. Reduce their risks

At the end of January, news broke that Japan’s central bank adopted a negative interest rate strategy; and the Federal Reserve mentioned stress testing banks using a negative rate for the 3-Month T-Bill. After hearing this news, my first thought was how an actual negative rate would be implemented from a modeling perspective. My mind immediately went off on a theoretical bent. I visualized crazy nonparallel yield curve shifts, simulation scenarios with negative interest expense and other fantastical simulations. The reality of what may actually happen, though, is much simpler than those crazy scenarios. If the economy is not improving, the Federal Reserve will change its policy to incent certain behaviors from banks. Depositors and banks may end up paying fees for having money at the bank. Loan rates may fall even further and the government may borrow more money at dirt cheap rates.

Will banks make more loans? This depends on how much you reduce their cost and risk. They certainly have the ability, but is the reward big enough to outweigh the cost and risk? A faltering economy may be the reason to spur the negative rates in the first place, so I’d assume risk is on the increase.

Will people leave money at the bank if they have to pay a fee and earn no interest? Doesn’t seem like much of a reward. Cost to the consumer increases and, due to fees, their risk of a declining balance goes up. The mattress may look like a good substitute.

So, from a theoretical risk modeling perspective, yes, you can show the effect of negative interest rates and the theoretical boost to lending and fee income. That’s not difficult. What may prove difficult is incenting certain behaviors without first reducing risk and cost, and with no guaranteed reward.

¹Kasanoff, Bruce. "Five Ways To Get Anyone To Do Anything You Want."Forbes. Forbes Magazine, 17 Apr. 2014. Web. 2 Feb. 2016.

Randow, Jana, and Simon Kennedy. "Negative Interest Rates - QuickTake."BloombergView.com. N.p., 29 Jan. 2016. Web. 16 Feb. 2016.