For years, European banks were leery of passing on the ECB’s negative -0.40% deposit rate to their clients for fears of deposit flight and other unintended consequences, in the process being forced to “eat” the difference and impacting their interest income.
However, after five years of NIRP, and with the ECB set to unleash even more negative rates in the immediate future, one bank has finally taken a stand: according to the FT, UBS plans to charge a negative interest rate on wealthy clients, those who deposit more than CHF 2 million with the largest Swiss bank.
While several, mostly smaller, banks in Switzerland and the eurozone already pass on the cost of negative official rates to corporate depositors, most large players have refrained from doing so with individual clients. But with the ECB expected to adopt a “lower for longer” stance as soon as the next central bank meeting, starting in November, UBS Switzerland will charge -0.75% a year on individual cash balances above 2 million Swiss francs, the same rate as the SNB’s rate.
The move, as the FT notes, “underscores how banks in Europe and the US are scrambling to prepare for a protracted spell of lower rates that threatens their profitability, having previously wagered that central bankers would tighten monetary policy.”
Last month the Swiss National Bank said it would hold the negative rate it charges on commercial banks’ deposits at -0.75%, while the ECB deposit rate is -0.4%, but is widely expected to drop by another 10-20bps, which in turn will prompt even more negative rates in Switzerland. In a note to clients last month, UBS forecast that the SNB would lower its rate on deposits to -1% in September, approaching dangerously close to the infamous “reversal rate”, below which accomodative monetary policy reverse and once again becomes contractionary for lending, i.e., the true lower bound of NIRP.
“A year ago everyone thought interest rates would go up. Now it doesn’t look like that,” said one senior wealth manager at UBS quoted by the FT.
To preempt the inevitable howls of rage from wealthy clients who will soon see their total savings shrink by 1% (or more) every year just to hold their money in the bank, UBS relationship managers have started discussing the forthcoming charges with some wealthy clients and are preparing to issue a letter outlining the changes. Some of the bank’s smaller rivals, such as Julius Baer and Pictet, already charge some clients with large cash deposits.
“We assume that this period of low interest rates will last even longer and that banks will continue to have to pay negative interest rates on customer deposits at central banks,” UBS said. “Following similar moves by a number of other banks here in Switzerland, we confirm that we’ve decided to adjust cash deposit fees for Swiss francs held in Switzerland.”
The UBS announcement comes on the same day as Credit Suisse, UBS’s main rival, said it was also thinking about imposing a negative deposit rate on some wealthy clients: “In Switzerland, we are considering measures on deposits to mitigate pressure of negative interest rates,” Tidjane Thiam, Credit Suisse CEO said during a discussion of the bank’s half-year results. And like UBS, the Credit Suisse levy would be “targeted on people . . . that measure their cash balances in millions.”
UBS did provide one loophole, saying that clients who want to avoid the levy can move their balances into non-cash assets or into “fiduciary call deposits” that can be transferred back to the customer’s main account within 48 hours. Such FDCs are held in third-party banks or UBS entities based outside Switzerland, meaning the lender does not have to pay negative rates to the SNB.
However, the lack of immediate access to funds – as UBS implements the effective equivalent of a 2-day certificate of deposit – raises the risk of unintended consequences, such as runs on various other assets should there be a dramatic change in financial circumstances and depositors seek access to any and all liquidity at a moment’s notice.
Whether such negative rates encourage savers to spend their money as central banks have been hoping all along, remains to be seen. In any case, one thing is certain: the unintended consequences of passing on the most destructive monetary policy onto end consumers and savers, will be dire and widespread, and could potentially result in the next financial crisis which, with some luck, will also be the last one.
For now, however, keep an eye on cryptocurrencies: last we checked, there was no cost, and no way to impose punitive rates, to keeps one’s savings in bitcoin and its peers, which should have obvious consequences on its price.
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