NEGATIVE INTEREST Hoarding Cash and Avoiding Fees

Fearing the European Central Bank will increase fees on their deposits, some Bavarian financial institutions are considering hoarding cash in their own safes rather than parking it with the central bank.
Stocking up on cash. German savings institutions are debating the banking equivalent of keeping cash under the mattress.

For a long time, the loose monetary policies of the European Central Bank have riled Germany's small savings banks. Now 71 Bavarian financial institutions are considering taking an unprecedented step in response.

Irritated by the interest penalty of 0.3 percent for overnight deposits at the central bank, the Bavarian Association of Savings Banks has examined whether it would be less expensive to store the money of their customers in a vault rather than with the ECB.

"If an independent savings bank takes its responsibilities seriously, then it is legitimate to consider the business costs," Ulrich Netzer, president of the Bavarian association of savings banks, told Handelsblatt.

Germany's smaller banks are up in arms over the European Central Bank's recent policies. While the central bank says it is trying to boost inflation and kickstart lending in the 19-nation euro zone – and especially in poorer southern European economies – savings banks are worried that the central bank is destroying their livelihood in the process.

More than most banking groups, Germany's small banks have long been dependent for their earnings on customer deposits. German households have historically been savers, rather than borrowers, and few savings banks have dabbled seriously in investment banking. But with the ECB charging banks for the past year if they keep too many of these deposits in reserve – the only major central bank to do so – savings banks are finding their very business model called into question.

"New risks and huge side effects are already developing today, especially for banks and financial markets that are critical to financial market stability," Gertrud Traud, the chief economist of the regional Landesbank Hessen-Thüringen.

Ms. Traud's message comes amid a joint effort by the country's savings banks to speak up against the big bad Frankfurt central bank. In a joint position paper, obtained by Handelsblatt, the chief economists of all German savings banks issued a clarion call for the ECB to change course.

Savings banks are asking whether it makes more sense to not store large sums of cash with the ECB, but to keep it themselves. Bavarian Association of Savings Banks

"The ECB is creating a crisis mood with its over-eager monetary policy measures, and thereby causing a further erosion of confidence in the euro zone," read the position paper.

The demand for a change of course is unlikely to be heard. The European Central Bank and its president, Mario Draghi, is widely expected to double down on its easy money policies at its next meetingon Thursday. The European Central Bank is likely to lower the negative interest on deposits even more, to minus 0.4 or 0.5 percent, though it may consider a tiered system that could ease at least some of the pressure in banking sector. Its goal is to prod the financial institutions into making more loans.

Small banks in Germany are hardly the only ones fighting back. John Cryan, the co-chief executive of Deutsche Bank, led a major pushback from Europe's banks last week. If the ECB interest penalty keeps rising, banks would lose more money in the deposit business, Mr. Cryan argued. He said banks would have to compensate for these losses, for example by making loans more expensive — and more costly credit could dampen growth instead of encouraging it.

Sergio Ermotti, who heads the large Swiss bank UBS, also believes the ECB underestimates the problems of negative interest rates. He warned last week of an increasing danger that bubbles could arise in the markets because of extremely cheap money. An increasing number of economists are also inclined to agree.


Overnight Deposits Held by the ECB-01 (2) euro zone banks negative interest rate


Some Bavarian banks are now seriously considering the alternatives. In theory, it could make more sense for these banks to not store large sums of cash with the ECB, but to keep it themselves. The trouble is the higher security risk – and therefore the insurance costs – of storing such large amounts of cash.

A spokeswoman for the Bavarian savings banks association confirmed that some members have asked about the insurance required for storing large amounts of cash.  The association has also presented the pros and cons of banks keeping more cash on hand in a letter to its members. The spokeswoman acknowledged she knew of no banks that are actually taking such a step, at least so far.

Space is not an issue, according to banking sources. Most savings banks still have room in their vaults that is not being used, according to one savings bank board member. But should the banks really decide to hoard significant amounts of new cash, their insurance premiums would rise accordingly. A spokesman for an insurance group in Bavaria said they have yet to be approached by a bank asking for their contracts to be negotiated.

"The savings banks will have to decide for themselves whether it really makes sense for banks to keep more cash," Mr. Netzer, president of the association, told Handelsblatt. The association has not made a recommendation either way to its members, he added.

But even if Bavarian savings banks refrain from storing excess cash in their vaults, the very fact that they are making the calculation shows how deeply the penalty interest is biting banks.

Whether it really pays to take such an extreme measure depends on who you ask.

The Bavarian savings bank association's calculations suggest an advantage in holding cash in vaults. The insurance on €1,000 would be €1.50 plus insurance tax. Altogether that comes to only 0.1785 percent, according to calculations by Frankfurter Allgemeine Zeitung. That is lower than the 0.3-percent fee the ECB charges banks to hold the money for them.

But while insurance on cash is cheap and many savings banks do in fact have vaults, it's questionable whether the Bavarian calculation includes all expenses. For example, savings banks might have to transport larger amounts of cash.

The word from savings bank circles therefore is that the ECB interest penalty would have to be significantly greater in order too exceed the costs of holding onto cash. This assessment seems to be widespread; no other regional associations are known to have launched similar initiatives.

Germany's national association of savings banks also disputes the figures from their Bavarian chapter. A spokesperson argued that, even with the current ECB penalty interest, it would make no sense to switch to cash for interbank transfers.

“We are not registering any increase in the circulation of cash at the savings banks,” the spokesperson said.

That doesn't mean banks aren't finding other ways of counteracting the ECB's measures. Many banks in Germany have begun passing the costs onto their customers, demanding that large businesses, in some cases even small and mid-sized companies as well as professional investors, pay penalty interest when they park large sums.

Up to now, such a step has been taboo with respect to private customers. The president of the German Association of Savings Banks, Georg Fahrenschon, recently said that he hopes “it will be possible to avoid this situation with regard to private depositors.”

But if the ECB continues to pile on the pressure, almost no one dares to exclude this possibility completely.


Elizabeth Atzler is a financial correspondent for Handelsblatt in Frankfurt, covering primarily smaller banks and bond markets. Frank Drost covers banks and regulation for Handelsblatt out of Berlin. Christopher Cermak of Handelsblatt Global Edition also contributed to this story. To contact the authors: [email protected], [email protected]