When a negative repo rate was introduced some time ago, it was discussed about the risk that ordinary private individuals could start paying money to have their savings in an account with the bank instead of getting interest on the money. For a while it was a little uneasy but nothing happened and then you have partly forgotten this concern. But maybe there is a negative interest rate even for private customers and lurking in the reeds?
The repo rate is in Sweden today at -0.5 percent and that in itself is a historically low interest rate
When negative interest rates were first introduced it was a very big thing and there was much talk about all the effects of this. For private individuals, however, the effect was fortunately not that nasty, but it was mostly about getting low interest rates on mortgages and other loans. The main disadvantage has been that it has been difficult to find a savings account with a reasonable interest rate.
The thing with a negative interest rate is that if the banks deposit money with the central bank, they get a negative interest rate on that money. This means that in practice they have to pay a fee for having money deposited rather than having to pay interest on the money. Thus, for the banks, it is rather a cost than a profit to deposit money in this way.
In view of this, there were also some discussions that a negative interest rate could lead to customers also paying a negative interest rate on deposited money and that it would therefore cost to have their money in a savings account or similar. In fact, several Swedish (and also other European) banks have introduced a negative interest rate for corporate customers, especially for amounts above a certain limit. This means that it costs money for companies to have the money sitting in an account.
However, the banks have chosen not to do anything similar for their private customers and it was also something that I myself discussed some when that issue was relevant. My guess was that it would be a big risk for banks to force ordinary private individuals to actually pay for their deposited money. It would probably lead to people moving from these banks to banks that have failed to face negative interest rates. Competition between banks would be too important and the risk of losing important customers too much.
The risk of negative interest rates for private customers was forgotten
After the first debate and fear of this, it did not become much more. The banks chose not to set a negative interest rate for their private customers and mainly only for corporate customers where the amounts were large. Soon, the risk of being paid for their savings money was partly forgotten and focused mostly on the benefits of a negative repo rate – such as low mortgage rates.
However, there is still a risk that ordinary people will have to pay to have savings deposited with the bank. It must not be forgotten that the bank must constantly pay to have money deposited with the central bank and thus they suffer a loss. They can alleviate the loss a little by forcing large corporate customers to a negative interest rate, but private customers and smaller companies have so far been spared.
As the repo rate has been negative for so long now, one can actually start wondering if the banks are starting to think about whether it would be reasonable to take a negative interest rate even for private individuals and smaller companies. Somewhere you can imagine that the limit goes for the banks’ patience.
In Europe there are indications of what might come
In Germany, the first savings bank has apparently started to charge a negative interest rate for private individuals, but only for those who have a lot of capital. If you have over 100,000 Euro then you are forced to pay -0.4 per cent interest, which means that you have to pay a “fee” of 0.4 per cent of your capital annually rather than having to pay interest on the money. This is Germany and not Sweden and it is just now for large sums, but the risk is that Swedish banks also follow suit over time and there is no guarantee that even ordinary private customers with less capital can suffer over time.
In Switzerland, for example, this has happened. It started with the banks first paying for corporate customers and private customers with really large saved capital, but then some banks also started introducing fees for all customers, no matter how large savings capital they have. Then even ordinary savers suddenly have to pay for their money instead of collecting interest on them.
Good location for both banks and private customers
Given that far from everyone wants to invest in shares or mutual funds and similar things, there are of course quite a few who can be affected. If you have a large part of your savings in savings accounts, it can be a bit boring. Other accounts may also be affected such as accounts where you have your savings buffer and other short-term savings that you do not really want to invest in any other way.
Negative interest rates for ordinary private individuals can lead to a lot of boredom and many people who become upset. It can certainly also be thought that there will be quite a large rotation of savings money between different banks and savings accounts in such cases – if people try to escape from banks with negative interest rates and to those who have chosen not to charge customers.
For the banks, this will of course be a difficult situation as no one expects to pay directly to have money saved in an account. Everyone is naturally used to getting some interest on their money and that they are growing slowly but surely. Right now, it is difficult to get particularly good interest rates on savings, but at least it is not a negative value. Exactly what happens if there is a charge to have the money deposited with the bank is difficult to say, but the reactions will be strong and negative is clear.
If the banks are now facing negative interest rates on their accounts, we can probably expect some sour mines and people who change banks. However, the question is whether it will be so for any longer period. Right now, no bank has dared to introduce negative interest rates, and of course I do not know how close any bank would be either, maybe not so close in the current situation, but on the first day the bank does well, it is possible that it is just the starting shot .
Once a bank has taken the step, other banks know that they can also follow and if all banks in the long run face negative interest rates, there is no good alternative for customers to switch to. Then we simply have to accept that it costs money to save money right now and it is no good to change to another bank even if they have the same arrangement.
Maybe people will invest more in stocks, funds and bonds etc instead, but this could also be a development that the banks would welcome. Instead of being forced to collect people’s savings, which they then deposit themselves with the central bank at a loss, they can sell to customers their own funds and the like and earn money on brokerage, management fees and the like. It can be a good deal for the banks.
The future is uncertain, but there is always a risk
I do not want to say now that there is no great risk that Swedish banks will introduce negative interest rates for ordinary private individuals in the near future or perhaps not even at all. This is a big step to take and so far no Swedish banks even have any negative interest rates for private customers with large savings capital. This is probably the first step that banks are taking and it is something we can keep an eye on.
What I want to say is really that among all the nice benefits of negative repo rate such as cheap loans and low housing costs, there can also be some nasty effects hiding in the shadows. These should not be forgotten. It must be remembered that banks are primarily companies that want to make money, just like any other company. The main reason for not introducing negative interest rates to all customers is not that they want to be kind, but that they are afraid that customers will become angry and flee the bank. So it is straight through for their own sake that they make their choices. The day they feel they are making more money by charging a fee for our savings, they will start doing so. Be so safe.