Many economists advocate negative interest rates as a means of preventing or curbing deflation. To others – like renowned economist Marc Faber – the practice of charging interest rather than paying interest on wealth invested in central banks is unjustifiable and can be equated to theft.
When a central bank imposes negative interest rates, commercial banks like retail banks and private banks must pay a fee in the form of negative interest in order to hold money in their central bank accounts rather than earning interest on their assets.
On December 18, 2014, the Swiss National Bank (SNB) announced its decision to impose negative interest rates on SNB account holders (primarily banks) with assets in excess of a certain threshold in their SNB accounts. Swiss banks which fall under certain categories are required to hold minimum reserves in SNB accounts. The negative interest rates took effect on January 22, 2015. The SNB justified its decision by citing the need to weaken the Swiss franc in relation to other currencies.
The SNB further raised its negative interest rates after removing its artificial floor on the Swiss franc to euro exchange rate on January 15, 2015.
Negative interest rates on savings accounts?
Banks could, in turn, pass on the negative interest rates which they pay to the SNB to their customers. If a bank were to pass on a negative interest rate of -0.1% to a customer who held CHF 50,000 in a savings account, the customer would have to pay CHF 50 in debit interest just to hold their assets in their bank account rather than being rewarded with interest for their investment in the bank.
However, the vast majority of Swiss bank customers are not likely to accept the idea of paying to invest their money in a bank. A broad move by commercial banks to negative interest rates would likely lead customers to withdraw their money from banks in cash and invest elsewhere.
A controversial topic
Whether Swiss banks will ever pass on negative interest rates to regular customers or simply compensate for the cost of paying negative interest rates to the SNB by raising fees and charges for other services remains to be seen.
Banks may raise the fees attached to private accounts (some have already done this) or implement fees for savings accounts rather than stop offering interest or charging negative interest. This subtle approach allows banks to continue netting profits while not entirely losing their allure for investors.
Some Swiss private banks already pass on negative interest rate to clients. Lombard Odier, for example, charges negative interest of -0.75% to depositors which hold assets of more than 100,000 at the bank. Other private banks may follow suit. A possible motive for the imposing of negative interest rates by private banks is as a means of pressuring clients into investing assets through their asset management services rather than holding savings.
The Alternative Bank was the first Swiss retail bank to implement negative interest rates. It currently charges negative interest of 0.125% on up to 100,000 Swiss francs held in a private account and 0.75% for amounts in excess of 100,000 francs. Negative interest rates do not apply to savings of up to 100,000 francs held in savings accounts, but amounts in excess of 100,000 francs are subject to a negative interest rate of 0.75%.
PostFinance, the Swiss postal bank, was the second retail bank to implement a negative interest rate. The -1% annual interest rate applies to customers who hold more than 1 million francs of savings in PostFinance accounts. The Zürcher Kantonalbank (ZKB) introduced a -0.75% annual interest rate for specific high-net-worth customers.
Swiss banks are already prepared
Many Swiss retail banks do not expect to implement negative interest rates for private savings. However, actions taken by many banks indicate that the possibility is more than just hypothetical.
Some banks, like the Zürcher Kantonalbank (ZKB), have already inserted clauses into their terms and conditions which give them the right to introduce negative interests on assets in savings accounts under certain circumstances.
Cash as a safe haven for wealth?
The initial reaction of many savers, should negative interest rates hit savings accounts, would be to cash out their accounts and hold their savings in cash. However, storing large amounts of money safely may incur security-related costs like the rental of a safe deposit box or the installation of an adequate safe.
Like assets held in savings accounts which do not pay interest, cash is subject to inflation. Money loses value on a constant basis, so when you hold money over long periods of time without earning yields on it, you are losing money by default. But at least you are not paying debit interest to a bank in addition to losses incurred by inflation.
Exodus to more generous banks?
Investment-savvy savers may invest their savings in stocks and other investment vehicles rather than hold savings in cash. Regular savers may move their savings into their private accounts if banks impose negative interest on savings only. If only some Swiss banks implement negative interest rates, as has been the case so far, depositors may simply move their asset to more generous banks to continue earning interest or at least avoid paying interest. Internationally-inclined savers may invest their money in foreign banks which pay high interest.
Negative interest rates in other countries
A number of European countries have implemented negative guide interest rates. One example is Denmark, which attempted to stem a strong inflow of capital from euro-zone countries by using negative interest rates to discourage investment. However, while Danish bank customers paid increased fees and charges for their savings accounts, they did not pay debit interest.
In 2014, a handful of banks in Germany imposed penalty interest rates on high-net-worth private savings accounts.
Negative interest rates in Switzerland
Negative interest rates have been implemented in Switzerland in the past, but only for institutional customers which transferred large amount of capital to Swiss call accounts and fixed deposits. In Switzerland, call accounts and fixed deposit accounts are primarily used by foreign institutional investors who are looking to preserve wealth by holding it in Swiss francs over the short term, and are willing to pay a premium for this service.
Swiss savings account comparison
Swiss private account comparison
Medium-term note comparison
Guide to Swiss bank safe deposit boxes
Swiss wealth management service comparison
Swiss securities brokerage account comparison
Investing during low interest periods