From Chris Vermeulen: European banks are starting to charge customers simply to hold their money, and the result will have big ramifications on the international banking and business landscape.
Low and negative yields mean that no one has the confidence to invest in real capital projects. Investors would much rather lose money over a 10-year horizon than invest in building dams, repairing pipes, creating better grids, starting new businesses, etc. A new monetary order must replace the existing one, and as soon as possible. It will likely be one that China is determined to dominate this time around.
The Bank of Ireland is set to become the first domestic financial institution to pass on the ECB’s negative rates to customers for placing their money on deposit with the bank. I have learned that the Bank of Ireland, which is 14% owned by the State, has informed its large corporate and institutional customers that it plans to charge them a negative rate of -0.1% for deposits of €10 million or more starting in October 2016.
Ulster Bank, which is owned by UK lender Royal Bank of Scotland, has already introduced negative interest rates for a small number of large corporate clients. Ulster Bank has products priced off the back of Euribor, a European interbank lending rate, which is at an all-time low and had turned negative last year. These interest fees being charged by the bank do not apply to SMEs or to personal customers.
Additionally, as Bloomberg reports, The Royal Bank of Scotland, which is Great Britain’s largest taxpayer-owned lender, stated that some of its biggest trading clients must pay interest on collateral as a consequence of low central bank interest rates. Some of the bank’s institutional clients will need to pay interest on funds pledged as collateral when trading futures contracts. The changes for sterling and euro futures and options trading will probably affect about 60 large clients. “Due to the sustained low interest rate environment, RBS will now be passing the cost of holding such deposits onto a limited number of our institutional clients,” the bank said in the statement. RBS said it had previously applied a zero percent floor to the overnight rate charged for collateral required by clearinghouses for future traders.
This is the first indication that the Bank of England’s decision to cut rates to historic lows is forcing lenders to collect negative interest from deposit holders.
Ironically, unlike Europe, the U.K.’s rates are (still) positive, even though the BOE recently cut the interest rate to an all-time low of 0.25% as it unveiled that it would resume monetizing government and corporate bonds. It may soon cut rates to negatives.
While the RBS move affects only a subset of business customers, some lenders in Europe, where both the European Central Bank and the Swiss National Bank have kept interest rates below zero for months, have been charging a wider array of customers in order to hold their deposits.
“What you’re seeing is there have been a few banks in Germany and a couple in Switzerland which have started to charge for deposits; importantly, it’s to corporate customers, or very wealthy people,” said Andrew Lowe, an analyst at Berenberg, as quoted by the FT. “You are likely to see the UK banks follow suit, in particular if rates fall further,” he added. “Everything that applies to Europe applies to UK banks as well.
After a certain period of time passes, it will also apply to less than “very wealthy people.”
The RBS charges would apply to clients who trade futures and options and, therefore, hold cash on deposit as collateral. He said customers were being encouraged to put their cash into bonds, instead, so as to avoid the cost.
In short, customers who hold money at banks are slowly beginning to get squeezed and charged fees. What does this mean? To me, I feel it’s going to be negative on the banks and their share prices as investor slowly move away from those banks and/or spread their money to other asset classes to avoid paying interest to a bank to hold their money.
Banks have it really bad, if you ask me. They are not making much interest on the capital they hold for clients, and charging customers to hold money is a sure way to lose some of their biggest clients and income.
The financial sector has never recovered from the 2008-09 bear market in stocks, and with, potentially, another bear market just around the corner, bank stocks could be in for a massive bout of selling.
Where could a large chunk of investors’ capital flow? Precious metals is one of the places, though many other greater opportunities are slowly unfolding, and it’s just a matter of time before we take advantage of them.
The iShares MSCI Europe Financials Sector Index Fund (NASDAQ:EUFN) rose $0.08 (+0.45%) to $17.06 per share in Wednesday morning trading. The largest U.S.-listed ETF targeting European financial markets, EUFN has plunged 16% year-to-date.
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