Would you pay a bank for the privilege of holding your money? This is a question that wealthy savers are having to ask themselves as lenders start passing negative interest rates onto their biggest account holders. The Swiss banks UBS Group AG and Credit Suisse AG are in the vanguard of these moves, as you might expect given their focus on rich customers.
This practice may be unusual, but these are strange economic times. Central bankers shouldn’t let such moves stop them from pursuing whatever monetary policy they see fit; and they should ignore fears that negative rates may amount to a form of expropriation from savers.
It’s nearly a decade since monetary authorities across Europe started experimenting with negative rates. After a short-lived experiment by Sweden’s Riksbank, in July 2012 Denmark’s Nationalbank started charging lenders 0.2 per cent for some of the cash parked in its deposit facility to defend the peg between the krone and the euro. Others soon copied it as a way to stimulate their economies. Since lenders know they have to pay for holding money above a certain threshold with the central bank, they will prefer do something more useful with it, for example by lending it to companies. (Or that’s how the theory goes, the reality has been rather more mixed on how far this has changed the behaviour of banks).
The European Central Bank has been the negative rate champion. It cut its deposit rate to -0.1 per cent in June 2014, before lowering it again three more times in the next two years. The ECB may trim it again in September from -0.4 per cent as it struggles once more with a weakening Eurozone economy. Other monetary authorities, including Switzerland and Sweden, also have negative rates.
Initially, lenders preferred to take a hit on their profits rather than passing on the central bank’s charges to their customers. This is changing. UBS says it will charge its Swiss clients a yearly fee of 0.6 per cent for deposits above 500,000 euros ($560,000), down from an earlier limit of 1 million euros. Credit Suisse will impose a 0.4 per cent charge on accounts of more than 1 million euros. Julius Baer Group Ltd., Switzerland’s third-largest wealth manager, is passing on negative rates on a case-by-case basis.
This has prompted calls for the ECB to rethink its policy because it’s too harsh on savers. Such criticism is bizarre. Central bank macroeconomic management has always created winners and losers. When interest rates are much higher than inflation, it’s borrowers who pay the price while savers rejoice.
It simply isn’t right to think that those who put money aside are more deserving than those who take on debt. People can borrow to invest in education or in a new piece of equipment. These are estimable actions, both for the individual who pursues them and for the economy as a whole.
It’s ironic too that after years of monetary easing being blamed (often unfairly) for fostering inequality by inflating asset prices, central banks are being asked to change course because they’re hurting rich people. Wealthy individuals have options if they don’t want to pay their bank a fee: They can split their money across multiple banks, change wealth manager, or put their cash to more productive use. The latter behaviour is precisely what central banks are trying to encourage.
After many years of unorthodox monetary policy and with inflation in the Eurozone still nowhere near its target, it’s fair to ask how effective negative rates can be. Central banks should also be mindful of the side effects, including on financial stability. But rich savers having to pay a fee is no reason to change course.