The Strategist

Upside-down economy: Fifth largest Swiss bank introduces negative interest rates for retail customers

11/14/2016 - 14:56

Swiss bank PostFinance will charge retail customers a premium for deposits larger than 1 million francs (a little more than $ 1 million). This is stated in a message on the credit institution’s website.
"I understand that this measure is not going to be very popular among our customers. No one likes to pay a commission," says General Director of PostFinance.

It is expected that the bank will charge a fee of 1% of the deposit amount from 1 February 2017.
The first Swiss bank to introduce completely negative interest rates was Zurich ABS. In October 2015, it warned about a new deposit rate of -0.125% per annum coming into effect since January 2016. The Wall Street Journal wrote that 1797 customers withdrew money from the bank in January; at that, customers opened 1830 new accounts. In January-February, other 59 new customers opened deposits.

PostFinance has grown from Switzerland Mail’s bank division. In 2015, the credit institution started closing credit accounts of customers living outside Switzerland. This decision was explained by increased regulatory costs, because of which the Swiss financial institutions found themselves at odds with legal regulations of other countries.

Early last year, Central Bank of Switzerland cut its benchmark interest rate to 0.75%. This means that the regulator will take 0.75% of money stored in the Central Bank. PostFinance says that it has already paid more than 10 million francs to the controller this year.

"Central Bank is unlikely to raise rates on deposits in the near future. That is why more and more Swiss banks are thinking about how to reduce losses. I would not be surprised if other banks followed case of PostFinance", - argues UBS chief economist Daniel Kalt.

Switzerland is not the only European country in which banks have begun to charge a fee for deposits from retail customers. In August, a savings bank of Raiffeisen community in the German town of Gmund am Tegernsee brought 0.4% fee for deposits of more than € 100,000.
Head of Association of German Savings Banks Georg Fahrenschon claims that it is getting on that majority of German banks will introduce deposit charges, as they have accumulated more than € 100 billion of excess reserves. This, in turn, means that they will have to pay 0.4% of this sum to European Central Bank.

ECB’s decision to introduce negative interest rates on deposits - for the first time in history - was adopted in June 2014. ECB President Mario Draghi said such measures were to stimulate the sluggish EU economy: Eurozone’s GDP growth was 0% in the second quarter of 2014. Most lending institutions then introduced a fee for deposits, but mostly only for large customers on average deposits over € 10 million.

Now, bank customers in some countries have to pay deposits of € 100 thousand, and even less. 

in April 2009, Gregory Mankiw predicted the Fed’s negative key rate. Decline in interest rates stimulated the economy and the key rate was already close to zero, so why not lower the rate to negative values? Then, idea of negative interest rates seemed absurd: you lend a dollar, but get just 99 cents back. Yet, Mankiw argued that the idea of minus numbers, initially seemed absurd, too.

Eventually, Mankiw's prediction came true, though not in relation to the Fed: in July 2009, Riksbank, the central bank of Sweden, introduced a negative rate. Then, the negative key rates appeared in several other countries, including Switzerland, Japan, Denmark, as well as in the euro area (deposit rate - 0.4% per annum). Moreover, the negative interest rate established on the interbank markets in some countries. Several bond yields also turned negative.

The Japanese and the Germans responded to the ultra-low interest rates with increased demand for safes. Negative rates are a potential threat of banks raiding, and may lead to a liquidity crisis.

Apart from Riksbank, one of the first banks to upset their customers with negative deposit rates was Alternative Bank Schweiz, which in 2016 introduced -0.75% rate on deposits exceeding 100 thousand francs. Soon, the institution was followed by another well-known Swiss bank - Lombard Odier. Thus, the first victims of negative interest rates were wealthy clients on deposits. It’s quite difficult to ‘hide in cash’ when your bank account is large enough.

Until recently, no bank has yet tried to extend the negative rates on individuals since the latter had one simple response: to take their money back. For the banks, in turn, it would result in too much trouble. Of course, the financiers still could find ways to make money. For example, they could increase fees for cash withdrawals, charges on banking transactions, and so on. Yet still, behavior of clients will be considered in any case. It also creates an understanding that negative rates will likely fluctuate at current levels, rather than go down.