Paying in order to save, for more and more private individuals it is the reality. Several large banks are lowering the threshold above which penalty interest has to be paid in large leaps. Where does it stop and are there alternatives?
At the beginning of this year, ABN AMRO was the first bank to take the plunge. On 1 April – unfortunately it was no joke – the savings interest rate was set at 0% up to a balance of EUR 2.5 million. On top of that, the wealthy saver had to pay for the money deposited at the bank via a negative interest rate of 0.5%. Shortly afterwards, ING and Rabobank followed with a similar intervention, albeit with a threshold of 1 million euros.
Since then, that threshold has been lowered by leaps and bounds across the board. ING and Rabobank have now set the bar at 250,000 euros. ABN recently lowered the threshold from 2.5 million to 500,000 euros. Until recently, Volksbank (the parent company of ASN, Regiobank and SNS) was missing from the list of major Dutch banks with negative interest rates. But private customers of Volksbank will also have to take advantage of it from next year onwards. From 1 March 2021, 0.5 percent will be charged for all deposits above 250,000 euros.
According to the banks, the main culprit is the European Central Bank (ECB). After all, the ECB is in charge of the European Union’s monetary policy and sets the level of what is known as deposit rates. This relates to the deposit facility, the possibility offered by the central bank to deposit excess cash with it. The deposit rate has been extremely low for a long time and has been set below zero since 2014.
For the central bank, this intervention is part of the attempt to keep the economy going: it is intended to force banks to put the money to work and lend it out, rather than holding it and keeping it. Money has to roll, doesn’t it? For imaging purposes: Dutch banks store between 120 and 200 billion euros every day for a Corona Millionaire on average in Frankfurt. That costs them many hundreds of millions of euros in ‚penalty interest‘ every year.
One problem is that banks cannot choose whether or not to deposit their money with the ECB. The bank is allowed to keep part of the cash in the house. That is intended for payments, payouts and ATMs. In addition, the bank must keep a money buffer for 30 days, to prevent the money suddenly running out when people come en masse to withdraw their savings. The rest must be transferred to Frankfurt, because any surplus money must be safely stored.
The cost of that? They are increasingly being passed on to savers.
Charging negative interest is a hot topic. In the months leading up to the announcement of the measure, there was a great deal of commotion about it. When former ING top executive Ralph Hamers cautiously put it on the table as an option in the summer of 2019 in talks with analysts, social media were followed by many angry reactions from customers who threatened to withdraw their accounts.
A survey by the Consumers‘ Association (June 2020) shows that almost two-thirds of the 6,858 respondents get their savings from the bank if they have negative savings interest rates on amounts below EUR 100,000. Another 1 in 6 consider this.
For the Consumentenbond, this is a reason to sound the alarm, as they believe that consumers are unwilling to take savings from the bank. After all, people who keep their savings at home bear the risk of fraud, burglary or fire. On 12 November 2019, the Consumers‘ Association therefore sent a letter of fire to Minister Hoekstra of Finance. They did so again on 22 June, accompanied by advice from Boels Zanders Advocaten. In the letter, the association asked that savers up to at least €100,000 be exempted from negative savings interest.
Minister Hoekstra does not want to know anything about such a ban. In answers to parliamentary questions raised on this issue, the Minister states that he considers the application of negative savings interest rates „undesirable“, but that „the consideration is also about the soundness of the system“. In doing so, he relied heavily on an analysis commissioned by the Dutch Central Bank, which put forward arguments such as freedom of contract, eroding the profitability of banks and thwarting monetary policy.
So far, the low interest rate on savings has not yet had the desired and expected impact on the behaviour of savers. In 2020, the total amount of savings of Dutch households rose to a record high of around 390 billion euros. It is called ‚Corona savings‘, which shows that the corona crisis is the main driving force behind the urge to save. It is a trend that is visible throughout Europe.
Another reason is that only a very small proportion of private individuals are facing negative interest rates. At Volksbank, this concerns less than 1% of customers and at ING 0.3%.
Nevertheless, it is good to think that banks are lowering the bar so quickly. Is the next step to penalise deposits above the barrel? After that, is saving in general discouraged with a penalty interest rate? The fact is that the idea of a negative interest rate is starting to get used to more and more. „Financial services are not free“, is the message, and as a bank customer you are „going to notice more and more in the future“. Anything to keep the current financial system going, because the ECB itself has few options left.
The ECB’s policy at the moment is to keep the euro afloat and allow money to circulate in the economy. A side-effect of this is that society as a whole is focused on the short term. Consuming now. Invest now. Taking on new debts now. Prepare for what you or your children will need in a few years‘ time? That is actively discouraged in this way.
In times of crisis, Europeans are not so easily tempted to spend and invest. Partly simply because it is not possible, for example, because the crisis has hit income hard. Others are uncertain about the period ahead and are strengthening the buffer. It is not for nothing that savings have risen to record levels in Europe this year.
However, the return on hoarded money is miserable. Interest on savings accounts without restrictive conditions no longer exceeds 0.3% in the Netherlands. With the majority of banks you receive (virtually) nothing more and on balance your accumulated assets shrink, for example due to inflation or the costs of managing them.
As a result, more and more people and companies are looking for ways to protect and grow the value of their capital. This can be done by securing savings for a longer period of time. Moving value to assets known as safe havens, such as gold and silver. Speculating on the price of real estate and shares. The one is more risky than the other, and moreover, there are fears that these asset classes have already greatly increased in value.
That is why bitcoin, a young money system with a built-in monetary policy that is focused on the long term, is becoming increasingly popular. For many people, it is still too young and unpredictable as an asset class to transfer all their savings to it, but it is increasingly being considered reliable enough to be exposed to it for a part, small or otherwise. In their view, zero is the wrong number.