President Trump is again pushing the Federal Reserve to take key interest rates into negative territory.
But the results of negative interest rates in Germany paint a troubling picture of just what the policy actually means for savers and for the banks that rely on interest income.
Germany’s central bank, the Bundesbank, reports that the personal savings ratio — the ratio of personal income saved to personal net disposable income — dipped to 10.8% earlier this year, from a high of 11.2% just a few months earlier. While that’s only slightly below the historical average, and much higher than the United States, it may signal Germans are fed up with getting little return on the cash they’ve stored at the local bank.
Negative-yielding savings accounts are common in Germany now, with some of the nation’s largest banks passing on the negative rates they receive from the ECB. For now, those rates are only hitting those with more than €100,000 (roughly $111,000) in a single account. But even savers far below that limit are, for the most part, receiving back less than 1% interest on a traditional savings account. Some banks are paying as low as 0.05%, eating into profits from an industry built around steady interest income.
“The longer the period of low interest rates persists, the more likely it is to place a burden on banks that ... primarily generate their income from traditional deposit-taking operations,” Bundesbank President Jens Weidmann told German bankers in May.
“In the long run, negative rates ruin the financial system,” Deustche Bank CEO Christian Sewing told the Handelsblatt conference in September. He warned of “grave side effects” for the entire eurozone, with savers penalized for stowing away cash while investors take larger risks to maximize returns.
Still, the Bundesbank objected to proposed new restrictions on charging savings customers negative rates.
“If banks were forbidden from charging negative interest rates, they would lack a possible instrument to be profitable,” Bundesbank board member Joachim Wuermeling told Reuters.
For the average German, it doesn’t help that inflation is running at about 1.5%, with predictions that could spike as high as 1.7% by 2021. That would eat up any profits from that meager 0.05% return on a savings account.
‘Potential side effects’
In his final news conference as ECB president, Mario Draghi said negative interest rates had been effective and remained the right course.
“The improvements in the economy have more than offset negative side effects from low rates,” Draghi told reporters last month. But the central bank in September acknowledged the impact on banks, and introduced a tiering system to help deposit institutions not lose money on the billions parked at the ECB. The rules, though, only apply to a small portion of the deposits and it’s not clear just how much impact they will have.
It’s also not clear if incoming ECB president Christine Lagarde might move to change policy. During her confirmation hearings in September, Lagarde signaled a review of the negative rate policy is likely early in her tenure.
“Though the impact of unconventional policies continues to be positive, we need to be mindful about their potential side effects and we have to take the concerns of people seriously,” Lagarde told EU lawmakers.
Still, for the average German and the banks that serve them, there’s very little hope of higher rates in the near future.
“Even though the tiered interest rates now introduced bring some relief, European banks will have to continue paying billions to the ECB every year as a kind of punitive tax,” Hans-Walter Peters, the head of the German Banking Association, said in a statement. “Persistently negative rates undermine trust in the functioning of economic processes, are harmful to funded retirement provisions and destroy the commercial basis for banks and insurance companies.”