Five years after Mario Draghi, the European Central Bank’s president, turned the world of European banking upside down, lenders are considering breaking a last taboo: Negative interest rates for the masses.
Banks have long tried to pass on the cost of negative rates to corporations and wealthy individuals, but they’ve shied away from making regular folks pay to have money in the bank. Yet after Draghi signalled that rates could go even lower, executives at Banco Sabadell SA and Commerzbank AG are saying they can’t rule out charging retail clients for deposits. Some bankers are even more sanguine in private.
“With a change of paradigm like the one we’re experiencing, you could say that it could be contemplated,” Jaime Guardiola, Sabadell’s chief executive officer, said of negative rates for retail clients. “There’s still some margin for error before this happens, but it could be envisioned.”
The question is, who will go first? Banks fear that whoever breaks that last taboo will suffer reputational damage and a large-scale client exodus. In a sign of just how contentious the issue is, particularly in a country of savers like Germany, the issue of negative rates on deposits has exploded onto the front pages of the country’s largest tabloid, and at least one top politician is calling for a ban.
Negative rates are a double whammy for banks, costing them more than 7 billion euros ($10.3 billion) a year for depositing funds overnight with their central bank, while at the same time eroding income from lending. That has pushed the share prices of many European lenders to record lows, and has left firms such as Deutsche Bank AG and Commerzbank reeling from falling revenue and shrinking profitability.
Until now, banks have responded by slashing costs and seeking to bolster fees from services other than lending. They’re also trying to hedge the cost of holding cash, but such moves carry the risk of creating a feedback loop that leads to still lower bond yields.
After cutting thousands of jobs with no end in sight, even a bank like Commerzbank — which has lured more than a million new clients by handing out cash to anyone opening an account — is entertaining the idea of eventually passing on the ECB’s punitive rates, even if it’s hypothetical for now.
“If there’s a market trend of negative rates being passed on to clients, we will have to look at that,” chief financial officer Stephan Engels told reporters this month. “If we were swamped with deposits as a consequence, we’d have to examine very closely how we could deal with that sensibly.”
Banks are already making companies pay for large cash balances, and wealth managers such as UBS Group AG and Credit Suisse Group AG are increasingly doing it for rich customers with unusually high cash holdings. There are even some retail banks — mostly smaller and regional lenders — charging for balances that exceed thresholds of as little as 100,000 euros, though often such penalties are only discussed on a case-by-case basis.
But by and large, banks haven’t passed on negative rates to regular folks, for fear losing too many deposits, which are a major source of funding. Changing that would also expose them to bad press. Bild, the largest German tabloid, has run front page stories this month warning that small savers’ deposits are no longer safe from penalty rates.
On Wednesday, Bavarian Prime Minister Markus Soeder told Bild that his party will put forward a policy initiative in Germany’s upper house of parliament to institute a negative-rate ban on retail deposits up to 100,000 euros. The move is supposed to send a message to Draghi’s successor at the ECB, Christine Lagarde, he said.
Message to Lagarde
“The federal government should make clear that negative interest rates aren’t a sensible way forward,” Soeder, who also heads the Bavarian sister party of Angela Merkel’s Christian Democrats, told the paper. “They set a completely wrong signal and lead to a running down of savings.”
Germany’s banking lobby groups pushed back on Thursday, issuing a joint statement condemning a ban and warning that such a move could destabilize financial markets. The finance ministry is examining whether a ban would be in compliance with the constitution.
In the Nordic region, where sub-zero rates have been the norm longer than most other places, the issue is also gaining prominence. Sampo Oyj, the Finnish holding company that owns about 20 per cent of Nordea Bank Abp, has urged lenders to change their attitude to the issue. Only when the finance industry acknowledges this will the ECB’s efforts to pump stimulus into the economy really work, Kari Stadigh, the chief executive officer of Sampo, said in a recent interview.
While bank executives might agree with the public criticism of negative interest rates, they have little room to offset even more punitive rates after five years in which the ECB tried to force savers to spend. Several have urged the ECB to consider exemptions from at least some of the charges for holding deposits, through a process known as tiering.
“I could imagine that many banks in the long run won’t be able to avoid passing on extra costs to a broader clientele,” said Hans-Walter Peters, head of the Association of German Banks, in a recent interview.
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Even if they’re thinking about negative rates for savers, however, bankers are hesitant to discuss it in public for fear of irking antitrust authorities, who might see that as an effort to get peers on board.
“We once had a remark from competition authorities that they don’t like financial institutions actually to guide too much,” Kees van Dijkhuisen, the CEO of ABN Amro Bank NV, told analysts on a conference call this month. “That’s actually why we are cautious with respect to saying we go into negative territory.”