Did you ever imagine having to pay money to keep your savings in a bank account? No? Well, in these times of extremely low interest rates, a new reality is rapidly approaching. As some of the European central banks have brought deposit rates below zero, negative interest rates on savings accounts are already here in certain countries and are certainly the object of much discussion in many others. No doubt a great source of worry for the individual saver, this blog takes a closer look at what this new phenomenon actually means – how will a negative interest rate work for real?
Headlines like “Saving in Germany: Worse than nothing” from the Economist or “Swiss central bank moves to negative deposit rate” in the Financial Times have abounded across Europe lately. Although many banks have vowed not to implement negative interest rates, a high number have already gone the other way. Several banks have introduced a negative interest for large corporate clients. Recently, German Skatbank and Danish FIH Erhvervsbank decided to introduce negative interest rates on the savings accounts of private clients as well, at –0.25% and -0.5% respectively.
For now, the negative interest rate is only applied to savings exceeding EUR 500,000. However, the main question is whether this will soon be applicable to all savings accounts and for all amounts in them – and perhaps most importantly, will other EU banks follow suit? Some seem more certain than others – in an interview, the Chief Investment Officer of Deutsche Asset and Wealth Management, Asoka Wöhrmann, said negative interest will be “no longer a rarity soon”.
Why Negative Interest Rates?
Growth in the Eurozone has been painfully slow to recover following the 2008 financial crisis. Slow growth usually means depressed inflation levels, which has indeed been the case lately. In an effort to stimulate growth and increase inflation over the past years, the European Central Bank (ECB) – and consequently the national EU central banks – have pushed down interest rates time after time. In February, the ECB moved the deposit rate south of zero to -0.2%. In practice, this means that banks depositing their money with the ECB have to pay money to keep them there. Ultimately, the ECB hopes that this will stimulate EU banks to invest that money into corporate loans, project finance or other growth-generating activities, rather than keeping the money with ECB.
What do Negative Interest Rates Mean to the Individual Saver?
Due to the crisis, interest rates on saving accounts are low. Consumers face interest rates as low as 1% on their saving accounts. Besides that, the individual taxpayer in some countries pays tax on savings. For the Netherlands, this tax rate is 1.2% for savings above EUR 20,000.
Taking into account the average European inflation rate of 0.43% (2014) they have a negative real interest rate on their savings already. A negative nominal interest rate will make things even worse. If negative interest rates become the new standard, there is no reason to put money in your savings account. The individual saver is forced to find other ways to gain interest on savings. The good old mattress becomes an increasingly attractive option…
What do Negative Interest Rates Mean to the Individual Bank?
The bank system, as we know it, is for the customer to pay interest for his loans while receiving interest on his savings. With the new reality of negative interest rates this system no longer seems valid. The question arises: Are we at the dawn of a new bank system or are the latest developments just a sign of lacking creativity to think out of the box?
On the one hand, it is easy to keep doing what you always have and just maintain the system in place. Place the money at ECB and charge a margin on top of that. But if the system changes and a new order develops, what kind of structure can we expect? A system where negative interest will be a new standard, like some predict.
How will this influence the risks of the bank? How will this influence the financial position of the bank? How will this influence the relation with clients who want a safe way to secure their money?
This blog has raised more questions than it has answered, but for the time being that is probably the best way forward. Answers are simply not yet readily available. If we are to hypothesize, the two banks mentioned above are the first of a long line if the interest stays as low as it is today. They are the early adapters and guide the way for the others.
Henri Buitenhuis is the Practice Leader Financial Institutions for Willis in the Netherlands. The Dutch practice is dedicated to support a broad range of Financial Institutions in an increasing risk environment. Finding new ways, solutions and answers that meet the need of the industry. Henri started his career in the insurance industry in employee benefits.