Coming Soon to a Bank Near You : Real Negative Rates

In Luxembourg and Germany, some banks have started to apply negative interest rates on deposits: In other words, they are charging interest on deposits! It was announced recently by DZ Privatbank in Luxembourg and by Deutsche Skatbank, a small credit union in Thuringia, a German land, and several German banks are about to make the same announcement. DZ Privatbank’s interest rate is -0.25%: Thus, a deposit of 1,000 euros turns into 997,5 euros after one year. “Strafzins”, meaning punitive interest rates, has become the new buzz-word in Germany.

Why are they doing this? For the simple reason, argue the banks, that the ECB itself has been applying negative rates since June, 2014, of -0.20%. Banks are losing money when depositing at the ECB, so they choose to have their clients foot the bill. The only way for those clients to escape this is by placing their money into the banks’ financial products (savings accounts, life insurance).

It is rare enough that an enterprise punishes its clients... But this strange action validates the fact that the interbank market in Europe is at a standstill, because normally a bank with liquidity makes loans to those in need, for a commission. These banks here are confessing they are putting all of their money with the ECB and this, for a very simple reason: They are certain of getting this money back, which is not necessarily the case with bank X. This precaution means that they do not have faith in the banking system, that the risk of failure remains significant. Actually, these banks are confessing that the financial crisis is far from over. Thanks for this confession...

So the client is led toward savings accounts or life insurance products. But is there any return on those? Hardly now, since interest rates are at their lowest. This is also the purpose of punitive interest rates, to force clients into the banks’ financial products, since those products bring in commissions, their bread and butter. This tells a lot about the banking system turmoil today: banks have to twist the arms of its clients in order to survive.

At the macro-economic level we can observe this aberration of the ECB’s zero-rate policy: It was supposed to jumpstart credit and growth, and it is failing miserably. And, furthermore, it profoundly perturbs the banker’s construct consisting of collecting savings and rewarding those who thus help financing the economy. When there is no investment with any yield at all, the bank becomes like a trap for the savers.

And, lastly, I would be remiss not to mention the irony of this situation, compared to gold. A foremost argument brought about by bankers when one wants to buy gold is that “it doesn’t yield any interest”. From now on, the banks are the ones not yielding any interest (either with cash or financial products), or barely. And, as everyone knows, a bank is much less solid than a gold bar... Let everyone draw one’s own conclusions.