Many Swiss banks have lowered the account balance thresholds above which customers have to pay negative interest charges. Customers with small account balances are generally not affected. At most banks, only a small portion of customers pay negative interest. The Luzerner Kantonalbank, for example, told moneyland.ch that only 99 percent of its customers have to pay negative interest.
Still, Swiss banks will not rule out the possibility of negative interest being imposed on smaller account balances as well. But why are there negative interest for bank customers in the first place? moneyland.ch researched the topic in an effort to shed light on this somewhat obscure practice.
Explanation 1: The Swiss National Bank’s (SNBs) negative interest charges
The negative interest charges which commercial banks must pay the SNB on their sight deposit account balances is a common justification for the negative interest rates for bank customers. But how much do banks actually pay to the SNB?
The SNB provided moneyland.ch with the figures showing its revenues from negative interest charges on the deposit account balances of commercial banks.
2015: 1164 million francs (over around 11 months)
2016: 1523 million francs
2017: 2021 million francs
2018: 2048 million francs
2019: 1938 million francs
2020: 1378 million francs
2021: 359 million francs (first quarter)
The figures show that commercial Swiss banks paid the most negative interest to the SNB in 2018. Since 2019, the numbers have been decreasing. The reason: The central bank raised its thresholds for negative interest charges. It is expected that the SNB’s collective negative interest revenues in 2021 will be similar to those in 2020.
The degree to which banks are affected by the national bank’s negative interest charges varies from bank to bank. For example, the Zürcher Kantonalbank is one of the commercial banks which has to pay relatively high negative interest charges. In 2020, Zurich’s cantonal bank paid the SNB 73.2 million francs.
But many other banks are hardly impacted by SNB interest charges, and some are not affected at all. Some banks even benefit from the SNB’s interest regime by profiting off negative interest via interbank transactions. They offer other banks the opportunity to invest their assets at negative interest rates which are less unfavorable than the SNB’s.
Curiously, the negative interest expenses of PostFinance, the national postal bank, are surprisingly low. PostFinance pools negative interest paid to the SNB and to commercial banks in the figures it publishes. These figures are:
2016: 24 million francs
2017: 6 million francs
2018: 16 million francs
2019: 5 million francs
2020: 2 million francs
These figures show that in 2020, PostFinance paid less than 2 million francs in SNB negative interest charges.
Verdict 1: The Swiss National Bank’s negative interest rates have been declining since 2018. So they alone do not explain the increase in negative interest rates for bank customers.
Explanation 2: The negative interest environment
Some Swiss banks say that the SNB’s negative interest charges are not the deciding factor behind negative interest rates for individuals. Instead, it is the overall negative interest environment which plays the primary role. For example, Credit Suisse told moneyland.ch that interest rates are generally determined by the market, and depend on many factors in addition to the SNB’s interest rates. The negative interest environment is directly impacting the bank’s profitability.
The Luzerner Kantonalbank says that the pressure to charge negative interest rates is largely the result of the intense competition with regards to lending terms and conditions. The longer the negative interest environment remains in place, the more important it becomes for banks to take action. The reason for this is that the number of fixed-rate mortgage contracts pre-dating 2015 decreases every year. De facto, a bank which continues offering interest of 0 percent or higher is forced to subsidize its account holders.
UBS economists argue that commercial banks expect expected the negative interest regime to be short-lived when it was introduced in 2015. That is one reason why they did not begin charging customers negative interest immediately even though money market interest rates were already slightly negative. Banks held onto that hope until the corona recession. But the onset of the recession made it clear that the negative interest environment was not going away anytime soon. According to them, that is the reason why the interest rates of account balances have only now been adjusted to match the money market reality.
But a look at business reports shows that many Swiss banks have increased their profits since the negative interest phase began in 2015. That has been the case with Swiss cantonal banks, for example. These are heavily focused on interest-related operations, which averaged across all cantonal banks account for 60 percent of total revenues. While the cumulative annual profits of all cantonal banks reached 2.5 billion francs in 2014, they increased to 2.9 billion francs by 2018 and 3.2 billion francs in 2019. Even in 2020, profits still totaled 3.1 billion francs.
Earnings from negative interest on passive business operations – which include negative interest charges to business and personal accounts in addition to interbank transactions – made up only a fraction of cantonal banks’ total profits. The exact revenues from negative interest charged to private customers are not known, but for most cantonal banks they are likely low in relation to total revenues.
That means cantonal banks at least are not yet dependent on negative interest charged to private customers. Even without charging negative interest, their revenues would still be substantial. The same applies to the majority of other Swiss banks.
The exceptions only confirm the rule. PostFinance, for example, has been hit much harder by the negative interest environment than other banks because it is not allowed to offer its own mortgages and loans. So the postal bank does not engage in the classic interest rate spread business.
Verdict 2: The negative interest environment does play a role in negative interest charges for bank customers. But for many banks, it does not in itself provide a sufficient explanation for the increase in negative interest charges for private customers.
Explanation 3: Incentive to use more lucrative banking products
For many Swiss banks – the interest rate spread business has once again become important or even central to operations – primarily with regards to the mortgage business. Bank Cler, for example, says that mortgages are one of its core businesses and will remain so in the future.
But Swiss banks are looking to become less dependent on interest-based operations. To achieve that, they are increasingly turning to the fee-based and financial service businesses. Asset management and financial advisory – both businesses which deliver steady ongoing revenues – have become a particular focus.
The Glarner Kantonalbank has been open about its shifting strategy to reduce dependence on interest-operations for many years now. The same holds true for the Berner Kantonalbank and Migros Bank. Valiant told moneyland.ch that is aims to expand its investment and retirement business sectors by 2024. Raiffeisen has made the development of its retirement and investment services a group priority.
Attracting savers alone is not a lucrative model for banks. On the other hand, customers who make a lot of currency exchanges, perform a lot of trades, or pay for asset management are good sources of revenue for banks. Swiss banks face a challenge in that by and large, Swiss are conventional savers and are famous for it.
Consequently, Swiss banks must work hard to convince their customers of the value offered by active financial services. In the current low interest environment, negative interest rates provide a new tool which banks can use to motivate their customers to sign up for financial advisory and asset management services. Wealth invested via investment services is not subject to negative interest rates like account balances are.
When banks lower the thresholds above which negative interest charges apply, the fear of losing money to negative interest incentivizes customers to use investment solutions.
This development is most obvious at PostFinance. The more a customer invests via the postal bank’s investment services, the higher the threshold for negative interest charges on their account balances is. But other banks too are increasingly citing negative interest rates in their marketing of investment solutions.
There are situations in which investing wealth offers advantages over holding money in savings accounts. But private customers should avoid signing up to the first investment solution they are offered without first understanding and comparing services. There are numerous offers from Swiss banks, so comparing costs and features before buying is highly recommended.
Verdict 3: At the moment, many Swiss banks could afford not to charge their customers negative interest. But negative interest rates are widely used to convince customers to move wealth from bank accounts to investment solutions and other more profitable financial services.
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