German bank charges negative rates on large deposits

A Bavarian bank has become the second German lender to say it will levy a negative interest rate on private customers’ deposits, in the latest sign of the strain that the European Central Bank’s monetary policy is putting on the country’s financial system.

In an effort to boost the eurozone’s flagging economy, the ECB has slashed interest rates to record lows, and, since March, has charged a 0.4 per cent fee on excess deposits left with it by eurozone banks.

But the policy has put increasing pressure on the business model of German banks, which have traditionally derived much of the earnings from net interest income, because many of them are unable to recycle all their deposits into loans.

The co-operative bank in Gmund am Tegernsee, a small municipality about 50km south of Munich, said that from September 1, it would levy a “custodian charge” of 0.4 per cent on deposits above €100,000.

The decision follows a similar move by Skatbank, a small German co-operative bank in the east of the country, which introduced negative interest rates for private clients on balances above €500,000 in 2014. Germany’s biggest banks, such as Deutsche Bank and Commerzbank, charge negative rates for big corporate and institutional clients but have shied away from passing them on to retail banking customers.

Josef Paul, a member of the management board of Raiffeisen Bank Gmund am Tegernsee, said that the decision was a direct response to the ECB. “It’s like a domino effect,” he said. “We are just passing on the costs that the ECB has placed on us.”

A spokesman for the Bavarian association of co-operative banks said it was unaware of any other members charging negative rates on deposits, but that lenders had no choice but to “deal with the business consequences of [ECB chief Mario] Draghi’s extreme policy and take measures to mitigate them”.

Mr Paul said that his bank had written to around 140 clients affected by the move at the end of June, and that about half had already reacted, either by switching their cash into other assets, or by moving it to other banks. Between them, the 140 clients had around €40m on deposit.

German banks are considering a variety of strategies in response to the low interest rate environment. These range from introducing fees for services previously offered for free, such as paper account statements, to keeping cash in vaults rather than parking it with the ECB.

Michael Kemmer, head of the association of German banks, said that it was up to individual banks to decide how to deal with the interest rate environment, but that he did not expect that “private clients across the board will have to pay for deposits”. “The competition in Germany between the banks and the savings banks is far too high for that,” he said.