Europe’s banks eye breaking last taboo with negative rates

Bloomberg

Five years after Mario Draghi turned the world of European banking upside down, lenders are considering breaking a last taboo: Negative interest rates for the masses.
Banks have long tried to pass on the cost of negative rates to corporations and wealthy individuals, but they’ve shied away from making regular folks pay to have money in the bank. Yet after Draghi, the European Central Bank’s president, signaled that rates could go even lower, executives at Banco Sabadell SA and Commerzbank AG are saying they can’t rule out charging retail clients for deposits. Some bankers are even more sanguine in private.
Banks fear that whoever breaks that last taboo will suffer reputational damage and a large-scale client exodus. In a sign of just how contentious the issue is, particularly in a country of savers like Germany, the issue of negative rates on deposits has exploded onto the front pages of the country’s largest tabloid, and at least one top politician is calling for a ban.
Negative rates are a double whammy for banks, costing them more than 7.8 billion a year for depositing funds overnight with their central bank, while at the same time eroding income from lending. That has pushed the share prices of many European lenders to record lows, and has left firms such as Deutsche Bank AG and Commerzbank reeling from falling revenue and shrinking profitability.
Until now, banks have responded by slashing costs and seeking to bolster fees from services other than lending. They’re also trying to hedge the cost of holding cash, but such moves carry the risk of creating a feedback loop that leads to still lower bond yields.
After cutting thousands of jobs with no end in sight, even a bank like Commerzbank — which has lured more than a million new clients by handing out cash to anyone opening an account — is entertaining the idea of eventually passing on the ECB’s punitive rates, even if it’s hypothetical for now.
Banks are already making companies pay for large cash balances, and wealth managers such as UBS Group AG and Credit Suisse Group AG are increasingly doing it for rich customers with unusually high cash holdings. There are even some retail banks — mostly smaller and regional lenders — charging for balances that exceed thresholds of as little as 100,000 euros, though often such penalties are only discussed on a case-by-case basis.
But by and large, banks haven’t passed on negative rates to regular folks, for fear losing too many deposits, which are a major source of funding. Changing that would expose them to bad press. Bild, the largest German tabloid, has run front page stories this month warning that small savers’ deposits are no longer safe from penalty rates.
Last week, Bavarian Prime Minister Markus Soeder told Bild that his party will put
forward a policy initiative in Germany’s upper house of parliament to institute a negative-rate ban on retail deposits up to 100,000 euros. The move is supposed to send a message to Draghi’s successor at the ECB, Christine Lagarde, he said.
In the Nordic region, where sub-zero rates have been the norm longer than most other places, the issue is also gaining prominence. Sampo Oyj, the Finnish holding company that owns about 20% of Nordea Bank Abp, has urged lenders to change their attitude to the issue.
While bank executives might agree with the public criticism of negative interest rates, they have little room to offset even more punitive rates after five years in which the ECB tried to force savers to spend. Several have urged the ECB to consider exemptions from at least some of the charges for holding
deposits, through a process known as tiering.