We have laughed about it for years at banking conferences, but rates at one bank, have in fact, gone negative. While earning interest on deposits has been a long held precept in banking, the Alternative Bank Schweiz (ABS), a community bank in Switzerland, is the first bank in history that has moved an entire product line to negative rates. As of this week, retail customers get charged 12.5 basis points for short-term deposits and 75 basis points on deposits above 100k Swiss Francs ($98,202).
Now we have seen many awkward pictures in banking, but the picture below of some of the Bank’s senior managers is right up there in the pantheon of awkwardness. However, the emotions that the picture is conveying are understandable, as no one can be comfortable with moving rates negative. The central bank of Switzerland has had interbank rates at -0.75% since January in a move to stem the rising Swiss Franc, so management at the Bank finally succumbed and figured they would have to do something other than losing money on every dollar of liquidity. Management is clearly not happy as negative rates tend to drive customers to other alternatives and will likely result in a loss of a material number of accounts. This is to say nothing of the operational costs that this bank has already incurred.
Switzerland is not the only country with negative rates as the European Central Bank, the Riksbank (Sweden) and Denmark’s central bank all currently have negative rates in an effort to push banks to make more loans and investments. In addition, several other major central banks, such as England’s have discussed such a possibility.
What Would Your Bank Do?
Luckily, the probability of negative rates is decreasing by the day, but it is interesting to surmise what would have your bank done had the Fed had to move lower than its current zero bound target Fed Funds rate? Would your bank have gone with a negative interest rate charge such as Alternative Bank Schweiz, would have imposed fees like many large US banks have done with their high deposit institutional clients, or would it have imposed controls on cash withdrawals in order to add duration to the deposits.
The companion set of questions of course is what would your bank have done with its cash balances, and how far for how long would your bank suffer negative rates from the Fed before it passed on to your customers? Finally, it is interesting to note all the operational changes your bank would have had to undergo, the largest being a major upgrade in your core system, as many core processors cannot accrue interest and analysis at a negative level. Training, marketing, statement rendering and policy would have also likely undergone material revisions.
This Thanksgiving, in addition to our friends, family and stakeholders, we are thankful that we don’t have to deal with negative rates. That said, our buckled pilgrim hats are off to ABS as not only were they bold enough to deal with the issue of negative rates, but this bank has our respect for being very forward thinking on a number of fronts. ABS offers a variety of innovative products and is committed to using banking to help better the society, holding themselves accountable for putting more women in management, increasing transparency in all management decisions and using their capital to promote more sustainable living.
Submitted by Chris Nichols on November 24, 2015