LISTEN TO ARTICLE 3:19 SHARE THIS ARTICLE Share Tweet Post Email

Photographer: Alex Kraus/Bloomberg Photographer: Alex Kraus/Bloomberg

Explore what’s moving the global economy in the new season of the Stephanomics podcast. Subscribe via Apple Podcast, Spotify or Pocket Cast.

After five years of negative rates imposed by the European Central Bank, German lenders are breaking the last taboo: Charging retail clients for their savings starting with very first euro in the their accounts.

While many banks have been passing on negative rates to retail clients for some time, they have typically only done so for deposits of 100,000 euros ($111,000) or more. That is changing, with one small lender close to Munich planning to impose a rate of minus 0.5% to all savings in certain new accounts. Another bank in the east of the country has introduced a similar policy and a third is considering an even higher charge.

The lenders are preparing for a prolonged period of negative rates as Europe’s economy slows. In September, the European Central Bank reduced the deposit rate to minus 0.5% from minus 0.4%, making it more expensive for banks to park their excess cash there. While there are some exemptions under the policy, years of sub-par profitability have left especially smaller lenders with few options to offset the cost of the ECB’s charges.

“The floodgates are open,” said Friedrich Heinemann, who heads the department on Corporate Taxation and Public Finance at the ZEW economic research institute in Mannheim. “We will soon see a chain reaction. Banks that do not follow with negative interest rates would be flooded with liquidity.”

Reputational Damage

German lenders have long resisted passing on negative rates to retail clients, concerned that they will face reputational damage in a country where people save far more of their disposable income than elsewhere in Europe. The country’s savings rate was around 10% in 2017, almost twice the euro-area average, according to Deutsche Bank AG. Lenders that pass on the ECB’s charges typically do so only for large corporations or wealthy clients, and for deposits above a minimum threshold.

Now Volksbank Raiffeisenbank Fuerstenfeldbruck, a regional bank close to Munich, is among the first brushing off such concerns. The bank says it will impose a negative rate of 0.5% on new clients who open a popular form of saving account.

The negative rate “is set by the ECB,” the lender said in a statement. “We have to park the new client money somewhere.”

Kreissparkasse Stendal, in the east of the country, has a similar policy for clients who have no other relationship with the bank. Both lenders levy the charges on new customers who open a type of savings account that allows for daily, unlimited withdrawals, a popular instrument among German savers. Existing customers are mostly exempt for now.

“For now, negative rates are probably a signal to new clients that a bank doesn’t need any additional deposits,” said Isabel Schnabel, a professor at the University of Bonn who was nominated by Germany to join the ECB’s Executive Board. “I would assume that banks are a lot more cautious with existing customers.”

Frankfurter Volksbank, one of the country’s largest cooperative lenders, is considering going even further and charging some new customers 0.55% for all their deposits, Frankfurter Allgemeine Zeitung reported, without saying where it got the information. The lender said in a statement it has not made any decisions yet.

( Quote added in fourth paragraph )