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Negative interest: why is there penalty interest?

2019-08-22T19:08:05.636Z

Prime Minister Söder and Finance Minister Scholz call for a ban on negative interest rates for savers. How common are they? And what does that have to do with the ECB?


For a long time, anyone who deposits his money in a savings account receives interest from his bank. However, that has changed a lot: today, savers usually get virtually no interest on their credit balances parked on savings accounts. Since they themselves are under heavy economic pressure, some banks have even begun to require customers to pay for the money they hold - so-called penalty interest. Specifically, this means saving is no longer worthwhile, but even punished. Bavaria's Prime Minister Markus Söder (CSU) and Federal Finance Minister Olaf Scholz (SPD) do not want to accept this. The most important questions at a glance:

What exactly are the politicians demanding?

In order to protect small savers from punitive interest, Bavaria's Prime Minister Markus Söder (CSU) wants to obtain a ban on negative interest rates by means of a federal initiative. He demands that savings amounts up to 100,000 euros are excluded from the negative interest. However, one has to know that the banks, which currently charge penalty interest, do so only from a minimum saving of 100,000. "Saving must be rewarded and must not be punished", he justified his demand. Also Finance Minister Olaf Scholz (SPD) has spoken out for the proposal Söder and now wants to check whether a ban on negative interest rates would also be permitted by law.

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Why do banks charge negative interest rates anyway?

The banks have been under pressure for years: On the one hand, ever stricter requirements of regulators and necessary investments in digitization are driving up costs. On the other hand, the banks themselves are also affected by the low interest rates, as a result of which their earnings collapse. For many years, the institutions had earned a living by earning more interest on loans as they paid savings on their deposits. But the days of abundant interest surpluses are over. And the hoped-for turnaround will not happen for the time being: the European Central Bank (ECB) keeps interest rates at a record low even longer than expected.

Since mid-June 2014, commercial banks must pay interest when they park money with the central bank. The ECB is currently demanding 0.4 percent penalty interest. This creates a cost pressure, which the banks partly pass on. In addition, especially in Germany, comparatively many savers invest their money in banks and credit institutions in order to protect them from the risks of the capital market - even though stocking or index funds are, in the long run, less secure but generally more profitable. Some banks allow themselves to pay for the management of these funds by imposing negative interest rates on their clients.

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How many banks are already charging a negative interest?

So far, it is only individual institutions that pass on the negative interest rates of the ECB to companies or large investors such as funds. Many a bank also asks wealthy private customers to pay. A survey of the financial portal Biallo among 1,200 banks and savings banks currently collects nationwide just 30 banks penal rates of private customers. Some of them start with credits of 100,000 euros, while at other institutions the sum is significantly higher. Accordingly, some corporate clients and institutional clients as well as funds are currently being passed on the costs of negative interest rates to 111 banks and savings banks.

The majority of private customers has thus far been spared from punitive interest. Behind this is not least the fear of many financial institutions to bail into the fiercely competitive banking market customers and lose them to the competition. The longer the low interest rates last, the less likely it will be for private customers to be spared in the long run. In addition, the pressure on the industry could increase further: ECB President Mario Draghi has already promised that the central bank could exacerbate the negative deposit rate.

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Can negative interest rates boost the economy?

Since the financial crisis in 2008, the European Central Bank (ECB) operates a low interest rate policy. By doing so, the ECB wants to create incentives for commercial banks to borrow money from it. Because the loans are so low interest rates, the commercial banks offer the loans cheap for their customers. Overall, this means that companies and households are increasingly in demand for investment and consumer loans. So more money is spent - the economy is growing and the economy is fueled, so the goal.

Another instrument of the ECB is the so-called deposit facility. Commercial banks can "park" their excess money with the central bank. With the ECB keen to see excess money flowing into the economy, the deposit rate is currently -0.4 percent. The ECB thus creates negative incentives for money deposits. The same effect would have negative interest rates on savings from private households. It would create incentives to spend the money saved.

Despite the negative deposit rate of the ECB, the use of the deposit facility has been increasing enormously for years. In April 2015, the banks stored nearly 70 billion euros with the ECB. Four years later, it is almost 620 billion euros.

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How common are classic savings systems?

Unlike in many other countries, the savings account is still very popular in this country: over two trillion euros, the Germans have invested on savings accounts, fixed-term and investment accounts that are not or very miserable interest. Overall, according to a study by the market research institute Kantar TNS Infratest, 45 percent of Germans still own a classic savings account. Thus, the savings account is still the most popular form of investment, and this despite the fact that low-interest-rate policies have no longer been profitable for years. According to a study by the asset manager Flossbach von Storch, only one in three Germans has adapted their saving behavior to this circumstance. Only 23 percent of Germans would invest long term in equities and equity funds. As a reason for this low readiness, the asset manager calls the fear of price fluctuations and the associated risk of loss of assets.

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Are there other ways in which banks can pay the expense of private customers?

Already today, many banks can pay their financial expenses elsewhere - for example, through the account fees. For many years, many institutions have waived all account fees, but since 2017, more and more banks are choosing to reintroduce them. This step was justified, among other things, with the financial costs for new services in the online area.

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What concerns are there against a ban?

"Legal prohibitions are alien to the system, they do not help the customer any further and can ultimately lead to dangerous instability on the financial markets," argues the German banking industry. Jürgen Gros, President of the Bavarian Association of Cooperatives, told Bayerischer Rundfunk: "I firmly believe that prohibitions can not be an instrument in a market economy, and that companies must be able to make good business sense." Stefan Schmidt, spokesman for financial consumer protection of the Greens in the Bundestag, had declared: "If you forbid the banks to pass on negative interest, they will instead turn to the clock screw" - that will make small savers even stronger.

with agencies

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Source: zeit

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