Negative Rates for the People Arrive as German Bank Gives In

When the European Central Bank introduced a negative interest rate on lenders deposits two years ago, few thought things would ever go this far.

This week, a German cooperative savings bank in the Bavarian village of Gmund am Tegernsee — population 5,767 — said itll start charging retail customers to hold their cash. From September, for savings in excess of 100,000 euros ($111,710), the communitys Raiffeisen bank will take back 0.4 percent. Thats a direct pass through of the current level of the ECBs negative deposit rate.

With our business clients theres been a negative rate for quite some time, so why should it be any different for private individuals with big balances?, Josef Paul, a board member of the bank, said by phone on Thursday. As it looks today, charges on deposits wont be extended to customers with lower amounts than 100,000 euros, he said.

Raiffeisen Gmund am Tegernsee may be a tiny bank thats only introducing penalties to well-off customers — it says fewer than 140 will be affected — but in principle the ECBs negative deposit rate was meant to encourage spending and investment in the euro areas sluggish economy, not to tax thrifty Bavarians. A spokesman for the Frankfurt-based central bank declined to comment.

For a QuickTake explainer on negative interest rates, click here

Indeed, introducing the sub-zero policy in June 2014 with a cut to the deposit rate to minus 0.1 percent, ECB President Mario Draghi said the move was for the banks, not for the people. Should banks decide to transmit the reduction to savers then thats their decision. Its not us, he said.

Since then, the ECB has chopped its deposit rate — what banks pay to park excess funds overnight — three more times. So far, policy makers have said there havent been any serious negative side-effects, such as customers withdrawing their cash and stashing it elsewhere. In that time, amid a moderate recovery, bank lending has returned to growth.

The risk for ECB policy makers now is that negative rates begin filtering through to the real economy while growth and investment is still sluggish, bringing the downsides of the policy without the upsides. Euro-area growth slowed in the second quarter, data released Friday show, leaving it vulnerable to any fallout from the U.K.s vote to leave the European Union.

In that environment, lenders in Europe regularly complain — and the ECB has acknowledged — that negative rates depress their profitability. Some are already charging corporate clients with large deposits. The Bundesbank estimated last year that the low-rate environment would cut the pretax profit of German banks by 25 percent by 2019.

Retail Taboo

But only two weeks ago, ECB board member Benoit Coeure said retail customers were staying with their banks because of signs they wouldnt be charged for their savings any time soon.

Deposits of both households and non-financial corporations have been growing over the past two years, at a similar pace to the period before we entered negative interest-rate territory, he said in a speech on July 28. Rates on retail deposits seem to have a zero lower bound.

Whether Coeure is essentially right — that Gmund am Tegernsees Raiffeisen is a rare case and on a broader scale the rates for ordinary depositors wont go below zero — may depend on how lenders in Germany and elsewhere respond to the taboo on charging retail clients.

Michael Kemmer, head of the Association of German Banks, said in a statement on Thursday that he doesnt expect others to follow suit.

Its up to each bank whether and how to charge for deposits, he said. The competition between banks and saving banks in Germany is much too strong.

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