Savers have been battered with paltry returns for some time now, but it hasn’t stopped them putting their money away: in the 12 months to November 2020, Irish customers put €13.4 billion in banks and credit unions, pushing household deposits up to an all-time high of €124 billion.
That build-up in deposits may stall, however, as banks increasingly look to pass on charges they face from the European Central Bank to hold money on deposit. Who will have to pay?
Why are banks looking to charge negative interest?
Banks have been paying the ECB to hold their excess funds – in simple terms, the amount of money in accounts that is not being lent out to borrowers – since June 2014. The ECB rates went negative as part of a policy to encourage more lending to kick-start economic growth.
Initially, banks took the financial hit themselves but increasingly they are now passing it on to customers.
What does it mean?
It means that you will effectively be paying your bank to hold your savings, not getting any return.
Who’s currently paying negative rates?
Credit unions, businesses and pension funds have been paying negative rates on deposits for some time now, with the charges ranging from about -0.65 per cent to -1 per cent.
Bank of Ireland has been charging negative rates on deposits for large institutional and corporate customers since 2016, while AIB has been charging negative rates to many businesses with more than €3 million on deposit. And the reach of these negative rates has continued to widen.
Last summer, Bank of Ireland said it would start charging a negative interest rate of 0.65 per cent on “specialised accounts”, which includes accounts held by pension schemes. At the time, the bank said it was “no longer sustainable” for it to hold such large funds without charging, pointing to ECB interest rates. It also said it would apply negative rates on deposits of more than €2.5 million from small to medium-sized businesses .
Ulster Bank began charging negative interest rates last July on savings over €1 million held by business customers, credit unions and other institutional clients.
So far, retail savers have escaped the hit, but they have been affected in other ways. AIB-owned EBS has a cap on savings of some €500,000, an approach that has also been adopted by most credit unions, with savings caps of as low as €10,000 in some.
Who’s likely to be hit next?
With banks unlikely to avoid ECB charges any time soon, they are looking to apply charges to a wider customer base.
It's a European-wide trend: earlier this month Swiss bank UBS said it would lower the threshold at which it starts imposing negative rates from €500,000 to €280,000, while Dutch group ABN Amro has done the same. It has slashed the threshold at which negative rates kick in from €2.5 million to €500,000, from January 1st this year.
In Denmark, meanwhile, up to 50 per cent of retail deposits have been hit with negative rates – again above certain thresholds. And this is likely what will happen – at least initially – in Ireland.
Last October, AIB changed the terms and conditions of deposit accounts for “micro-businesses” to allow it impose negative rates on such customers in the future.
And, as also reported in The Irish Times back in October, the bank is looking to to lower the threshold of savings at which it starts charging depositors from €3 million to €1 million this year. That will impact thousands more depositors. Impacted customers will be given 60 days’ notice of any rate changes, under Central Bank rules.
It's not just traditional banks that are affected. Negative rates were also introduced by German fintech bank N26 late last year. It is imposing a surcharge of 0.5 per cent on "large" deposits in excess of €50,000 for new customers.
Will negative rates apply to smaller deposit accounts?
It remains to be seen if banks want to weather the likely storm that would erupt if they started charging smaller retail customers to hold their money.
Bank of Ireland chief executive Francesca McDonagh said last July the bank did not have a plan to charge retail customers or small businesses negative interest rates. However, if you read the terms and conditions of the bank’s retail deposit accounts, they state: “We may at our discretion apply a negative rate of interest to the account at a rate or rates that we determine.” So the option is there.
In the short term, however, it’s likely that banks will continue to levy negative rates only on those with “significant deposits”.
After all, banks can make up the shortfall in other ways. Towards the end of last year, both AIB and Bank of Ireland significantly increased charges that customers pay on their current accounts.
If you’re looking for a silver lining, one Irish Times letter writer might raise a smile. He questioned whether, if savers are paying negative interest rates on their savings, the Government should not be paying them negative Dirt tax on the losses? Wouldn’t that be nice?