Negative savings rate cannot be ruled out

Posted on 13-09-2019 by F. Geurtsen

Analysts say there is a real chance that consumers will have to start paying interest on their savings. The cash that Dutch banks keep every day and compulsorily deposit with the European Central Bank is currently costing them over half a billion euros a year, due to the negative deposit rate. Despite this, the ECB announced another interest rate cut. At the same time, however, this will involve compensation.

'Dutch banks have a combined 138 billion euros of excess liquidity, and they pay 0.4% on that,' argues Elwin de Groot of Rabobank. 'So do the math.' At 550 million euros, Dutch banks account for 8% of the 7.2 billion euros the ECB charges eurozone banks annually. For ABN Amro, for example, the levy from Frankfurt comes to 120 million euros, about 5% of annual profits. This week, the ECB decided to cut deposit rates further, from -0.4% to -0.5%, but the central bank also indicated how the levy will be partially offset. For Dutch banks, this means that the bill will turn out slightly lower than assumed.

'Banks mainly look at each other'

Yet if this policy continues there will ultimately be nothing for banks to do but pass on the cost to customers, thinks Alistair Ryan of Bank of America Merrill Lynch. 'We believe a wave of negative savings rates is coming,' he writes in a report. 'Passing on costs is risky and politically unpopular. But what must, must. It is coming. It is up to the ECB to explain to consumers that this is exactly what negative interest rates are meant to do.'

Banks are mostly looking at each other. Many institutions are already passing on the ECB's levy to companies and high net worth individuals, but they all fear that ordinary savers will pack their bags if they are the first to make the fee negative. Still, ING chief Ralph Hamers said at the half-year results that he could not rule out his bank making the move.


Hamers' colleague at Volksbank, Maurice Oostendorp, recently announced that he would "enter into discussions" with his customers about negative interest rates in the coming months. He dares not predict anything about the outcome of this 'guiding enquiry', but it will be 'taken into account in the policy'. It seems that Oostendorp thinks he has to prepare his customers for the inevitable. Incidentally, other banking products, such as a current account, could of course also be chosen to be substantially more expensive.

In a recently published study, the ECB suggests that individual banks could, for instance, reduce their excess cash by lending more money, or by buying securities. The only problem is that this solves nothing for the banking system as a whole. It only leads to liquidity ending up with another bank.

Banks can, however, convert their reserves into cash and then put it under the proverbial mattress. According to Ryan, the amount of cash that eurozone banks put in the vault increased by 50% when the deposit rate was cut from -20 to -40 basis points. But at €80 billion, this is still a relatively small amount. In total, there is 1,800 billion euros of excess liquidity in the eurozone system. US bank analysts estimate the cost of storing and insuring the physical money at between 0.5% and 1.0%.

A significant further reduction in the deposit rate would soon make it interesting for banks to indeed store the money physically. In Switzerland, this is presumably already happening. There, the deposit rate is -0.75% and the central bank indicates that 90% of Swiss franc 1000 banknotes are now out of circulation.

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