Deposit Fees Don't Bank on It

The decision by a German bank to begin charging some customers for depositing money has triggered a broad debate over dwindling options for Europe's notorious savers.
Sleep tight? Yeah right. Nightmare scenario for folks who love to save.

The financial industry is starting to hit Germany’s traditional savers where it hurts. Call it another by-product of the five-year old euro zone debt crisis.

This week, a bank said it would charge some customers for depositing money. Deutsche Skatbank, a cooperative bank in Altenburg in south-central Germany, said it was introducing "negative interest rates'' -- a form of deposit fee -- on savings deposits of more than €500,000 from private customers.

The fee would be another hurdle to German households, which are traditionally big savers and are running out of investment options in the current low-interest rate environment.

The bank in the German state of Thuringia is small and experts believe it is highly unlikely this will become widespread practice among banks.

But Germany's central bank, the Bundesbank, and consumer advocates have already issued warnings.

Penalty interest rates are a bad signal and damage the already battered confidence in banks. Christian Ahlers, Consumer advocate

Scaring consumers with the prospect of negative interest rates will have a "negative impact on the savings culture," Andreas Dombret, the Bundesbank board member in charge of financial supervision, said on Monday.

This was bound to happen sooner or later. The European Central Bank has since June been charging banks to park their customer deposits with the central bank. The Frankfurt-based ECB is trying to encourage banks to lend out the funds instead, but it was only a matter of time before a bank decided to pass this cost on to its customers.

“It does seem the near inevitable consequence of where we are. The ECB is desperately trying to support the economy,” said Richard Barwell, the London-based chief European economist for the Royal Bank of Scotland. “Even if we look at Germany, it’s not the case that inflation is robust. It’s not the case that the economy looks that healthy either.”

German savers shouldn't be looking to the Bundesbank or the ECB for help. Every bank can set its own policy when it comes to savings interest, Mr. Dombret said. Consumers do not have a fundamental right to earn positive interest: "Regulators are not going to step in here," he stressed.

The problem is more acute in Germany, which has a higher saving rate compared to other nationalities. However, OECD data show that the savings rate in Germany has already declined in recent years by about 14 percent to 9.9 percent today. A large share of financial assets is parked in regular bank accounts and savings accounts, amounting to a total of more than €2 trillion ($2.5 trillion)

The European Central Bank set the ball rolling for this in June, when it for the first time began charging banks in the 18-nation euro zone a negative interest rate for the funds they deposit with the central bank. That rate has been lowered again since and is currently at minus 0.2 percent.

The objective is to discourage banks from parking their customers’ deposits with the ECB. Banks should instead be earning money by lending out their deposits to companies and other consumers. They should not be passing on the penalty interest rates to their customers.


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But the problem risks creating another front in the ongoing euro zone crisis. German savers have long complained that they are being penalized for frugality while those with unpaid debts in southern European countries are being bailed out. Such disputes over inequality and redistribution are common when a national central bank lowers interest rates – penalizing savers – but the problem is more acute in the 18-nation euro zone.

“As always, there is added complexity here in the euro zone. The debate is much more complicated when it’s had across national boundaries rather than within,” Mr. Barwell of RBS said. “It could get worse before it gets better. The ECB could need to do more, not less.”

German consumer groups warned that charging German savers risks eroding the credibility of financial system, which has already been harmed by the 2008 financial crisis.

"Penalty interest rates are a bad signal and damage the already battered confidence in banks," says Christian Ahlers, a consumer advocate with the Association of German Consumer Organizations.

Some bankers are also worried too: The German Savings Bank Association (DSGV), which represents the network of savings and loan banks in the country, is already warning the financial industry that such actions could quickly backfire.

For the moment, most bankers and experts say that customers will simply park their money with another bank. But the worst case scenario is that customers will take to hiding their money under mattresses instead of taking it to the bank. "That certainly isn't what anyone wants," Mr. Ahlers said.

Not surprisingly, banks are trying to appease the public. "I will never, ever impose negative interest rates on savings deposits," Theodor Weimer, head of Munich-based HypoVereinsbank, said in late September.

Officials at Commerzbank, Germany's second-largest lender, are also trying to play down the issue. The retail bank ING-DiBa, which has more than 6 million deposit accounts, also said it has "no plans whatsoever to introduce negative interest rates."

It does seem the near inevitable consequence of where we are. The ECB is desperately trying to support the economy. Richard Barwell, Chief European economist, Royal Bank of Scotland

Still, some savers are no doubt confused, perhaps in part because of the conflicting statements made by experts at Deutsche Bank, the country's largest lender.

"In light of the ECB's low interest-rate policy," negative interest rates "will no longer be a rarity soon," even for private customers, said Asoka Wöhrmann, chief investment officer with Deutsche Asset & Wealth Management, the investment subsidiary of Deutsche Bank, in an interview with the national Sunday newspaper Welt am Sonntag.

In contrast, Ulrich Stephan, his counterpart in the bank's private and corporate customer division, said: "Deutsche Bank currently has no plans to introduce fees for deposits in its general customer business."

So who is right? In a terse statement, the bank attributed the different views to the fact that Mr. Wöhrmann is more of an asset management strategist, while Mr. Stephan focuses on strategy in the private and commercial lending business. Yet Mr. Stephan’s choice of words – “the general customer business" leaves room for speculation.

Large business customers already pay penalty interest rates on deposits with a few banks. Businesses have already threatened to close their accounts as a result. Pressed on Monday, Deutsche Bank declined to officially say it will not introduce negative rates on anyone.

A banker with a large German bank describes the problem in a nutshell: "Statements like these create unrest, which nobody desires. Any bank that introduces penalty interest rates for even a small share of its private customers runs the risk that many other customers will leave the bank as a precaution. A run like that could jeopardize the entire bank's refinancing."

For now, financial experts don't believe that banks and savings banks will introduce penalty interest rates on private customers across the board. There’s simply too much competition among banks for customer deposit accounts, said Sigrid Herbst of the FMH financial consulting firm in Frankfurt.

"For now, banks will try to reach their earnings goals by selling products that entail higher commissions," said consumer advocate Niels Nauhauser of the Baden-Württemberg Consumer Assistance Office.

Yet for consumers preparing for the worst, the search for alternatives isn’t always easy. Low interest rates have given customers in Germany little choice when it comes to where to park their money. The yield on German government bonds maturing in four years or less, which investors consider safe and as a replacement for liquidity, is currently negative.

The German Stock Institute, DAI, which is aligned with banks, also advocates other forms of investment. "Investors should consider investing at least some of their assets in stocks – the dividend yield alone is currently higher than the interest rate on checking accounts," said Franz-Josef Leven, deputy managing director of the DAI. "However, you shouldn't invest money you might need in the short term," he noted.

This is why Germans should still keep money in their bank accounts, despite the many obstacles.

"The low interest-rate environment is already a huge problem for investors," said Mr. Brandes. "Nevertheless, there are still good reasons to put money aside – as a reserve, for example, or to pay for a child's education. Abandoning everything is no alternative."


Anke Rezmer is a reporter for Handelsblatt in Frankfurt and covers investments and funds. Christopher Cermak is an editor with Handelsblatt Global Edition, based in Berlin, and writes mostly on the finance sector. Kerstin Leitel, Laura de la Motte and Susanne Schier contributed to the story. To contact the authors: [email protected] and [email protected]