German banks grappling with the burden of negative interest rates are fighting back against a proposal to ban them from passing on the costs to their retail depositors. They warn that such a move could unleash “dangerous instability” on financial markets.
Markus Söder, the minister-president of Bavaria, proposed the ban last week in response to fears that banks could start charging their depositors if, as expected, the European Central Bank cuts interest rates further into negative territory next month. The idea is gaining political traction in Berlin.
The ECB’s deposit rate of minus 0.4 per cent already costs German banks € 2.4bn a year. Some German lenders contacted by the Financial Times, including the country’s biggest savings bank Hamburger Sparkasse, said they had started passing on some of this cost to their largest depositors.
Olaf Scholz, Germany’s finance minister, said last week that officials would examine the legal implications of blocking banks from levying so-called “penalty interest” on retail deposits of up to €100,000.
The Federal Association of German Banks has hit back at the idea. “Legal prohibitions are alien to the system, do not help the customer any further and can ultimately lead to dangerous instability on the financial markets,” it said in a statement.
“In a market economy, credit institutions — like all other merchants — calculate their prices and fees on the basis of the market environment on their own responsibility,” said the body, which represents more than 1,500 institutions. “This is also true in times of negative policy rates that the banking industry cannot ignore.”
The spat highlights how the unconventional monetary policies of the ECB have stirred up controversy in Germany, a nation of savers who are outraged at the idea of being charged to deposit their spare cash.
German banks are hit the hardest in Europe by negative interest rates because they hold about a third of the total excess deposits on which the ECB levies negative rates.
"What should an honest and law-abiding German citizen think when their finance minister, a high-ranking representative of the state, is investigating whether he can protect them from the actions of another state body, the central bank?" asked Stefan Schneider, chief economist for Germany at Deutsche Bank, in a note on Friday.
Some banks have passed the cost of negative rates on to companies and other financial institutions that hold deposits with them. But most have not done so for households, fearing that consumers could move their money to a cheaper rival or withdraw it as cash.
This has squeezed banks’ profit margins, particularly those that rely on retail deposits for a large part of their funding, adding to the woes of a eurozone banking sector that still has not fully recovered from the 2008 financial crisis.
The ECB is expected to mitigate the cost for banks of lowering its deposit rate in September by introducing a tiering system that excludes a portion of excess deposits from negative rates. This would be similar to rules already in place in other countries with negative deposit rates, including Japan, Denmark and Switzerland.
Hamburger Sparkasse told the FT that it already levies “custody fees” on private customers with deposits above €500,000 and corporate customers with over €250,000 in their account. “Currently, we are still avoiding the passing on of ECB low interest rates in the broad retail banking sector,” it said. “How much longer we can do that depends on the ECB’s continued low interest rate policy, which is already costing us a lot of money every day.”
Beyond passing on the cost of negative interest rates to depositors, some banks are encouraging other uses for their money, such as investing it in bonds and mutual funds.
Berenberg, the Hamburg-based wealth manager and investment bank, told the FT that it had negotiated a “safekeeping fee” for any sight deposits that were not covered by asset management mandates.
The trend has also taken hold outside the eurozone. Jyske Bank, Denmark's third-largest lender, has said it would charge customers with balances over DKr7.5m ($1.1m) a default rate of 0.6 per cent a year. UBS also plans to levy a negative interest rate on wealthy clients who deposit more than SFr2m ($2m) with its Swiss bank. – Copyright The Financial Times Limited 2019.