Negative interest-rates are on the march yet again

A feature of the modern era is that things which are permanent are described as “temporary”. This has been particularly true in the era of interest-rates as it is easy to forget now that the low interest-rates of 2009/10 were supposed to be so. The reality is that they went even lower and in more than a few places went negative which again was supposed to be temporary. But the list got longer along the lines of the famous Elvis Presley song.

We’re caught in a trap
I can’t walk out
Because I love you too much baby

I have written before that I think that there are two factors in this being passed onto the ordinary depositor. Firstly how negative interest-rates become and secondly how long they are negative for. The reason why there is any delay in the pass on to depositors and savers is that the banks are afraid they will withdraw their cash and hence break their business model apart.

Germany

On the 19th of last month we noted that some German banks were looking to spread the negativity net wider and according to Bloomberg some smaller ones have broken ranks.

After five years of negative rates imposed by the European Central Bank, German lenders are breaking the last taboo: Charging retail clients for their savings starting with very first euro in the their accounts.

While many banks have been passing on negative rates to retail clients for some time, they have typically only done so for deposits of 100,000 euros ($111,000) or more. That is changing, with one small lender close to Munich planning to impose a rate of minus 0.5% to all savings in certain new accounts. Another bank in the east of the country has introduced a similar policy and a third is considering an even higher charge.

This is the system we have some to expect where a small bank or two is used as a pathfinder to test the water. I wonder if there is some sort of arrangement here although this from Bloomberg is also true.

 While there are some exemptions under the policy, years of sub-par profitability have left especially smaller lenders with few options to offset the cost of the ECB’s charges.

The irony is not lost on me that policies brought in to protect “The Precious” are now damaging it and may yet destroy it. I also find it fascinating to whom Bloomberg went for an opinion as it is straight out of the European equivalent of Yes Prime Minister.

“For now, negative rates are probably a signal to new clients that a bank doesn’t need any additional deposits,” said Isabel Schnabel, a professor at the University of Bonn who was nominated by Germany to join the ECB’s Executive Board. “I would assume that banks are a lot more cautious with existing customers.”

Kylie Minogues “Spinning Around” should be playing in the background to that. Still Isabel should fit in well with the ECB Executive Board as we get some strong hints as to why she was nominated.

Who is it?

The banks are shown below.

Now Volksbank Raiffeisenbank Fuerstenfeldbruck, a regional bank close to Munich, is among the first brushing off such concerns. The bank says it will impose a negative rate of 0.5% on new clients who open a popular form of saving account……….Kreissparkasse Stendal, in the east of the country, has a similar policy for clients who have no other relationship with the bank. Both lenders levy the charges on new customers who open a type of savings account that allows for daily, unlimited withdrawals, a popular instrument among German savers. Existing customers are mostly exempt for now.

The way that this has been such a slow process shows that the banks are afraid of deposit flight or a type of run on the bank. So far we do not know when that would occur although we do know now that some versions of negative interest-rates do not cause it. As the plan below is for an extra -0.05% it seems unlikely to be the trigger.

Frankfurter Volksbank, one of the country’s largest cooperative lenders, is considering going even further and charging some new customers 0.55% for all their deposits, Frankfurter Allgemeine Zeitung reported, without saying where it got the information. The lender said in a statement it has not made any decisions yet.

Denmark

The Straits Times has picked up on an interview by the Governor of the central bank Lars Rhode and it is rather revealing.

In Denmark, where banks have lived with negative rates since 2012, it’s now clear that life below zero isn’t about to end any time soon. People need to understand that it’s “lower for longer”, Rohde said. And that will “definitely” have negative consequences for lenders, he said.

He also gave a speech yesterday and in it there was this.

Digitalisation and new legislation give more players access to the market for bank products. From the payments market we know that digital solutions have a tendency to create natural monopolies because it costs less to perform one extra transaction once the digital infrastructure is in
place.

That was ominous as banks already have problems with their business model and it got worse as he told them who he had in mind.

In recent years, we have seen tech giants, such as Apple and Amazon, enter the financial market. Experience from both the USA and China shows that these firms are extending their original core business to include payments and subsequently also financial services such as
lending.

Is he telling them they are obsolete and dinosaurs. Still he did manage some humour.

Well-functioning IT systems and a tight rein on costs will be key competitive parameters for banks in the coming years.

As the Straits Times puts it.

But years of negative rates, tougher regulatory requirements and, in some cases, out of date technology, have put some banks on the back foot.

Indeed this may put a chill down bankers spines.

According to a report in Borsen on Tuesday, Apple Pay has now established itself as a considerably more popular app among Danish shop owners than a local mobile payment solution offered by Nets A/S, which has so far dominated digital payments within the Nordic region.

So far Danish banks are resisting the trend towards negative interest-rates for all.

For now, lenders have drawn the line at 750,000 kroner (S$152,000), which is the threshold below which deposits are covered by guarantees.

Comment

There is a steady drip drip here and there is some other news which suggests to me that the ECB may be genuinely afraid. In its latest round of monetary easing there was also tiering of deposits for banks at the ECB itself which may reduce the costs there by a third. But in the last week or two there are signs of something more subtle regarding bank capital.

Enter Mr Enria new head of the SSM… And Unicredit’ s new business plan presented this morning. In which they make clear that Pillar 2 would be CET1 AT1 and T2. This means in practice :

A) a big CET1 relief for banks (80bps for Unicredit)

B) a massive need of new AT1/T2

( @jeuasommenulle )

He thinks that today’s announcement from Unicredit of Italy hints that the capital requirements for risk-weighted assets are being trimmed. There has been a change in who is in charge and more flexibility seems to be in the offing. This adds to the hint provided last week in the proposed banking merger between Unicaja and Liberbank as in the past it might have been stymied by a demand for more capital. Oh and SSM is Single Supervisory Mechanism.

This echoes partly because of this if we return to the Governor of the Danish central bank.

This creates an underlying need for consolidation, also within the financial sector.

So it is a complex picture and remember some policymakers at the ECB wanted to turn the screw even harder with a Deposit Rate of -0.6%.

 

 

12 thoughts on “Negative interest-rates are on the march yet again

  1. Shaun, great reporting. Isn’t the Straits Times from Singapore – I wonder what the Danes are being told by their local media? Or indeed if this is covered by the British press?

    It seems central bankers have removed the need for banks to compete for depositors’ savings. I wonder how they think the New World will work?!

    • Hi DD and thank you.

      Yes it is. I used to read it via the Herald Tribune back in the day as it used to take leaders/articles from around the world and I liked that. It had a different spin and indeed points from the speech on the DNB website so someone had done their research.

  2. Hello Shaun,

    If the present banking model is replaced by an online / AI version then why would we need central banks and Mark ?

    I’m sure Amazon Echo could make the same noises , and provide a better sweet trolley selection!

    Forbin

    PS: probably better with popcorn orders too!

    • Hi Forbin

      It would appear that Mark has other plans.

      “Bank of England governor Mark Carney, who previously served as Canada’s top central banker, will be taking on a new role as the United Nations’ special envoy on climate action and climate finance.

      UN Secretary-General Antonio Guterres made the announcement while speaking to reporters in Madrid on Sunday, adding the move will take effect next year.” ( From CBC in Canada)

      In fact they are positively gushing about him,

      “Speaking at a news conference ahead of a climate summit that opens in Madrid on Monday, Guterres described Carney as “a remarkable pioneer in pushing the financial sector to work on climate.””

      The comments section is headed by this though.

      “Banker now environmental expert. Really? The rich can do anything as long as taxpayers are forced to pay their salaries, forever it seems .”

  3. Small problem for savers, where do you put your money once you have withdrawn it, another bank also paying negative rates? The banks know this and IMHO for this very reason have nothing to fear, and will keep imposing more and more negative rates. Michael Hudson thinks rates could go as low as minus 25%, got those pitchforks ready?

    • Kevin,

      In response to your question as to where you put your money I have theory on that front.

      I don’t think we would be seeing negative interest rates like we are without expectations that the global economy is set to get worse and inflation will collapse. It may be deflation is the next worry.

      If that were to happen then money under the mattress could be the way forward as deflation will ensure cash buys more.

      Now I could be wrong about all this and its a simplistic theory, but we wouldn’t be seeing such negative rates unless there was major concerns in the world.

      Put it this way the suggestion to me is assets are too high and they are due to burst.

  4. Peter,
    There will be major concerns and they will impose negative rates, to counter previous recessions the Fed has traditionally had to cut rates 4-5%, this times the Fed funds rate is currently 1.75% so do you think they will stop at zero?why would they?more importantly who will stop them robbing savers to pay borrowers mortgages and banks profits?They are also going to start buying corporate bonds and eventually equities with freshly printed money what do you think that will do to inflation?

    In fact in anyone’s lifetime, can you tell me when this country or the USA has ever suffered the “pain” of falling prices for any sustained period in ANYTHING? With a fiat currency that can be created out of thin air it is simply impossible for there to be deflation, but inflation is very easy to create but once started almost impossible to control, as I have predicted on here before, central banks via the governments, will be literally giving money away to the people, leading to hyperinflation and a collapse in the currency.

        • forbin, kevin,

          I haven’t a crystal ball but only got hunches and my hunches have suggested a new world in economics and that is what is happening with negative interest rates. They have been cut and there is little inflation so cutting interest rates haven’t done as some have expected and increased inflation.

          Maybe shaun has a theory about where all this will end up as assets and debt cannot both keep rising indefinitely without defaults.

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