Reiner Brüggestrat believes negative interest rates are an "absolute abomination." The head of Hamburger Volksbank can understand it if his customers are outraged. Nevertheless, this month the bank began charging retail and commercial customers a 0.2 percent fee for parking more than €500,000 ($531,000) in overnight money accounts.
In the past, the bank had discussed possible negative interest with customers on an individual basis. One could talk about alternative forms of investment, "but an incentive function is always needed," said Mr. Brüggestrat. But now words alone are apparently not always good enough. "The argument wasn't as persuasive as we had imagined."
A number of savings banks and credit unions, at least a dozen throughout Germany, are now taking an approach like that taken by Hamburger Volksbank. Handelsblatt has learned that these lenders have established a ceiling at which penalty interest begins to apply to commercial customers. Banks that have either introduced or announced an additional fee include Stadtsparkasse München, Ostsächsische Sparkasse Dresden, Kreissparkasse Köln and Dortmunder Volksbank.
Banks are hardly able to earn money anymore with excess deposits. They are hard pressed to find opportunities to safely and liquidly invest these funds. Martin Hellmich, Frankfurt School of Finance professor
Charging ordinary savers penalty interest is still a taboo. But it is increasingly common for companies, professional investors and municipalities with high deposits. Of the 25 large banks Handelsblatt questioned, only one clearly stated that it did not charge companies penalty interest.
The development is a sign of how much of a burden the penalty interest imposed by the European Central Bank (ECB) is for banks. The ECB started charging banks that park money a fee of 0.2 percent in June 2014, hoping it would motivate consumers and companies to buy or invest their holdings and support economic growth, in order to stave off a scenario of deflation, or falling prices.
For about a year, the central bank has increased the penalty to 0.4 percent for overnight deposits. It's an expensive proposition. According to Barkow Consulting, the ECB penalty interest cost German banks a total of €1.1 billion last year.
"Banks are hardly able to earn money anymore with excess deposits. They are hard pressed to find opportunities to safely and liquidly invest these funds," said Martin Hellmich of the Frankfurt School of Finance.
Record low interest rates have made it difficult for banks to make money on loans they issue Germany, while they have to pay money when they park funds at the ECB. On the other hand, consumers and corporations in Germany, a country of savers, face the dilemma what to do with their surplus funds if they don’t want to invest in riskier stocks, bonds or other securities. Each year, inflation is lowering the real value of their cash holdings.
But data shows that negative rates are becoming an ever more normal reality. For the first time, even the average interest rate for new corporate overnight deposits has now slipped slightly into negative territory, according to Barkow Consulting. In November and December 2016, the average interest on fresh overnight deposits across was negative 0.02 percent. It applies to deposits with different duration contracts, meaning that the interest rate for a deposit is, for instance, set for one month or six months.
Many banks have long tried to convince companies with large deposits to use other forms of investment. When they are unsuccessful, the banks charge what the industry calls a "deposit fee" or "credit fee."
Banks usually consider customers on a case-by-case basis, taking into account such factors as the size of the customer and any other business dealing they may have. "The amount of the custodian fee is also based on how much business the customer does with us," said Hamburger Sparkasse, Germany's largest savings bank.
Deutsche Bank said that it is "in close communication" with institutional customers with an additional need for deposit products, "to arrange for suitable investment alternatives or compensation models." Germany's largest bank was unwilling to comment on the details, but a spokesman did not rule out this negative interest could be involved.
Hypo-Vereinsbank is having individual conversations with "customers in the public sector and commercial customers with especially higher deposit volume" to develop "compensation models." It also said it was unwilling to rule out penalty interest.
I suspect that wealthy private customers will be the first to pay a custodian fee, followed by average private customers down the road. Martin Hellmich, Frankfurt School of Finance professor
Only one of the private, cooperative and public sector banks polled clearly stated that it has not charged commercial customers penalty interest: Bank für Sozialwirtschaft. It is considering taking this step, however.
The trend toward a threshold at which penalty interest start to kick in has been especially evident since the beginning of the year. Stadtsparkasse München, which will begin charging a 0.4 percent penalty interest for commercial deposits over €250,000 in April, said the move was necessary because of substantial charges it faces, noting that it has paid €10 million in ECB penalty interest since 2016. Besides, a bank representative said, other banks have also begun to introduce "custodian fees."
The effect is especially obvious in the eastern German state of Saxony. Last fall, Sparkasse Dresden, the state's largest bank, introduced penalty interest for deposits of €1 million or more. Early this year another bank in Saxony, Sparkasse Leipzig, also began charging commercial customers penalty interest beginning at a certain deposit level. Other banks, like Sparkasse Meißen, Leipziger Volksbank, Sparkasse Vogtland and Kreissparkasse Bautzen, have followed suit.
Hardly any lenders want fresh cash, possibly even from customers with whom they have had nothing to do in the past. This is why some banks are specifically targeting new customers with negative interest. For example, in December VR-Bank Mittelsachsen began charging new customers a 0.3-percent fee for short-term deposits of €100,000 or more.
The penalty interest has so far only affected a relatively low number of corporate customers. At Hamburger Volksbank, for example, only about 100 commercial customers are paying to deposit money. However, finance professor Hellmich is convinced that the group of affected customers is growing. "I suspect that wealthy private customers will be the first to pay a custodian fee, followed by average private customers down the road."
Elisabeth Atzler has been a banking correspondent of Handelsblatt since 2012. Eike Hagen Hoppmanns has been working at Handelsblatt since November. To contact the authors: [email protected]