Are negative interest rates on the way for ordinary savers?
Banks are already charging corporate customers for keeping money on deposit.
Companies, pension funds and credit unions are all paying up to 0.6pc to put spare funds on deposit.
This has raised fears household deposits will be next to have negative rates imposed on them.
Negative interest rates occur for savers when they are charged interest on their deposits rather than having interest credited to them.
Having negative rates imposed on savings would do a lot of damage.
Take a lump sum deposit of €100,000. If there was a negative interest rate of 0.65pc, which is not untypical of rates imposed on corporates, it would wipe €650 off the deposit after a year.
In five years, the €100,000 lump sum would be down to €96,792.
This means negative interest would have cost a saver more than €3,000 after five years.
There are fears that personal customers could be hit with negative interest rates later this year.
Ulster Bank’s exit from this market has added to these concerns as experts believe other banks will impose negative interest over certain thresholds to avoid being inundated with money that was in Ulster Bank deposits.
Banks and credit unions are being flooded with savings by consumers, and corporates.
Last autumn, AIB said it was looking at imposing negative rates on high-net-worth individuals with balances of more than €1m.
AIB has been charging negative rates to many businesses with more than €3m on deposit, but it has now said this threshold is to fall to €1m.
Recently, AIB executives said the volume of deposits that will be subjected to negative interest rates will quadruple this year to €16bn.
Its customer deposits jumped by more than €10bn last year to €82bn, as households and businesses set aside precautionary savings during Covid-19.
This month, Bank of Ireland said it is considering increasing the number of customers paying negative rates on their deposits.
This comes as it increasingly moves from paying customers to lodge their deposits to earning an income from them.
Already, €1 out of every €10 on deposit with the bank incurs a charge, and this is set to increase further.
Bank of Ireland Chief Executive Francesca McDonagh said the bank was looking at lowering the deposits threshold at which it charges negative interest rates to €1m.
Ulster Bank started imposing negative rates last July on savings of more than €1m held by business customers, credit unions and other institutional clients.
Banks are imposing negative interest rates as they face charges from the European Central Bank (ECB) to hold money on deposit.
The ECB charges banks a rate of minus 0.5pc as it is trying to encourage more lending to stimulate economic growth.
The theory goes that by imposing negative rates on banks, it makes the returns for them from lending to businesses higher than investing the funds in other ways.
Credit unions, businesses and pension funds have been paying negative rates on deposits they have in banks for a while.
Credit unions are forced by regulatory rules to put funds, such as member savings, that are not loaned out, into the banks.
This has raised fears that personal customers will be next to have negative interest rates imposed on them.
Already EBS has a cap on savings of €500,000, while large numbers of credit unions have savings caps of as low as €10,000.
German fintech bank N26 said last year it was imposing a charge of 0.5pc on deposits in excess of €50,000 for new customers.
Just before Christmas, a large credit union introduced transaction charges for members who want to access their savings accounts.
The move by First South in Cork is believed to be the first time any financial institution has put in place charges for transacting on savings accounts.
There is a fee of €1 each time a First South member wants to lodge money or take it out of their savings account.
Instead of paying €1 for each transaction, members of the credit union have been given the option of paying €4 a month to cover all in-person branch transactions and electronic transfers.
Banks are now paying savers at best just 0.01pc for demand deposits. The National Treasury Management Agency recently cut the interest rates on a string of State Savings products, in a move that is set to hit savers hard.
Banking analyst with Goodbody Stockbrokers Eamonn Hughes says the strong deposit growth across the system, with substantial excess liquidity, provides the cover for the banks to implement negative rate moves.
But he adds: “We still think negative rates on mainstream retail customers will be a bridge too far, though we are seeing the banks more willing to push up the cost of managing accounts with higher fees given the excess liquidity.”
Founder of financial well-being provider MoneyWhizz and qualified financial adviser Frank Conway says negative interest charges are common on commercial accounts and there have been a lot of signals that those charges could be extended to personal savers, especially those holding significant deposits.
All this means is that people with significant savings in banks need to be prepared for negative rates becoming a more prominent feature of banking in this country.
