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Banks Pass Negative ECB Rates To Customers

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Banks Pass Negative ECB Rates To Customers

A second German bank has implemented negative interest rates on consumer accounts, a sign that retail banks are being compelled to enforce central bank policy on ordinary citizens.


Cooperative bank Raiffeisen Gmund am Tegernsee began charging business customers negative interest rates in 2014, shortly after the European Central Bank first cut interest rates for banks to -0.1%. The ECB cut those rates deeper into negative territory this March, setting the benchmark rate at -0.4%.  Raiffeisen Bank could no longer afford to absorb the increased expenses and was forced to pass along this fee to its most well-heeled depositors.

Starting next month, retail customers will be assessed a 0.4% fee on funds over €100,000 held in their accounts. “With our business clients there’s been a negative rate for quite some time, so why should it be any different for private individuals with big balances?,” Josef Paul, a board member of the bank, said. “It’s like a domino effect,” he said. “We are just passing on the costs that the ECB has placed on us.

Paul said that the bank, located in a resort village 50 km south of Munich favored by famous actors and athletes, had written to the 140 customers who would be affected by the new fees. He said about half of the clients had moved excess cash holdings into other assets, or had withdrawn their cash. Between them, the 140 clients accounted for €40 million of deposits.

Blazing The Trail For Big Banks?

This action by Raiffeisen follows that of another German bank, Deutsche Skatbank. Skatbank began levying a -0.25% interest rate on all its largest depositors in 2014 after the ECB pushed rates further into negative territory. The negative rate (which applies to businesses, institutions, and very wealthy individuals) is calculated on deposits over €500,000, but are not assessed unless the account balance exceeds €3 million. A bank spokesman laid the blame for the charges at the feet of the ECB and the interbank loan system (which passes along the negative rates the ECB charges them).


No other bank followed Skatbank's lead of passing through the ECB's negative interest rates to retail depositors until this week's announcement by Raiffeisenbank. This cracks the door open just a little wider for German megabanks such as Deutsche Bank and Commerzbank. These banking giants, among others, have been passing on the ECB's negative rates to business clients, but hitting up retail customers for fees has been, until now, a "bridge too far." Predictions, however, that competition among German banks would prevent them from charging retail customers negative interest rates may start sounding a little hollow, as profits continue to suffer.

Deutsche Bank economists predict that the German banking system will lose €787 million this year alone from the ECB's policies. Bundesbank analysts calculate that pretax profit at German banks will fall by 25% by 2019 due to the squeeze from shielding retail customers from negative rates. Since the introduction of negative interest rates in June 2014, the ECB has cost Eurozone banks more than €2.64 billion.

The Devil In Frankfurt


The European Central Bank continues to claim that the negative interest rates it charges Eurozone banks has no effect at all on consumers. When announcing the first rate cut below zero, ECB president Mario Draghi said that the previously unthinkable policy shift was “for the banks, not for the people.” In his mind, if the banks don't want to pay the ECB to store excess reserves, they should lend it out. That, of course, presumes economic activity and business confidence that makes people want to take out loans. When asked about the effects negative rates would have for bank customers, Draghi said "Of course, commercial banks may react to our decision by choosing to lower their rates if they think they should do so, and this would be then transmitted to savers. But it's not us. It's a decision taken by the banks. So it's completely wrong to suggest that we want to expropriate savers.

If one believes him, one might say Draghi is paving a road to somewhere using good intentions.

Bankers' Revolt?

Negative depository interest rates mean that for every €1,000 in excess deposits a bank hole at the European Central Bank, Mario Draghi takes €4 annually. Take that up to €1 billion, and the ECB is snatching €4 million from the bank's account.


Rumors continue to swirl that some major banks are considering a "stuff your money in the mattress" plan writ large, as a protest against Mario Draghi's confiscatory monetary policy. Commerzbank is one name that keeps popping up in this regard. The idea is to redeem most of the bank's electronic money for physical banknotes, then store the literal tons of money in giant vaults. According to Reuters, Commerzbank representatives have already met with German banking officials regarding the logistics of such a move.

Their task would be a bit more than twice as difficult if the European Central Bank's sudden big push to abolish the €500 note comes to pass. The ECB says it's to prevent its use by criminals. No one has asked, to our knowledge, whether the ECB would consider attempts to opt out of their negative interest rate policy a crime.


There are other hurdles already in place, it seems. A Swiss pension fund tried to withdraw its money to store it in a vault, in order to avoid negative interest rates. When they contacted their bank, they refused to give them their money in physical cash. National central banks could also block attempts to move large amounts of cash from numbers in a computer into physical banknotes. Any bank wishing to convert part of its reserves into cash would have to ask their national central bank to provide the banknotes. The central bank might refuse on the grounds that suddenly increasing the money supply would destabilize financial markets, even if the bank was going to put the banknotes into storage.

If Commerzbank actually pulled the trigger on such a scheme, other mega-banks might follow. Every billion euros that the Big Banks converted into physical banknotes and stored away would place that much more money beyond the influence of the ECB. If banks are holding most of their deposits themselves, it wouldn't matter how deep into the negative Mario Draghi drove benchmark interest rates. Those physical bank deposits would be effectively immune.

The Financial Times notes that any such move may be an expensive protest. Not only would a vault and security be needed, but an insurer found that would be willing to be on the hook if something happened to all that money.

Power To The (British) People?

Until now, banks In the United Kingdom have avoided charging corporate and institutional customers negative interest rates. This could change soon, as the Royal Bank of Scotland and NatWest have recently changed their terms and conditions in preparation to levy fees on excess deposits.

British investors, already casting a wary eye on the events across the Channel, are showing no signs of knuckling under. Inquiries are being made of whether charging negative interest on savings is even legal. The Guardian newspaper quotes the worries of some British depositors:


One treasurer of a local community council, who received a letter but asked not to be named, said: “Can they do that, is it legal? The letter goes on to say that they ‘value our relationship with you’, but I may need to review how much I can afford to have a relationship with them!” Another customer, who holds funds for her grandchildren in a business bank account, said: “Will this spread to all high street banks? I can’t access it myself to put it under the mattress.”

Despite concerns on the street, UK banks are gearing up to pass on the ECB's negative interest rates to large clients. Barclays, HSBC, Lloyds, RBS, and Santander UK hold 85% of the British business current account market. Like the German banks waiting for the first one to break the ice on charging retail savers negative interest rates, high street banks in London are waiting for one of them to get the party started in the UK.

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The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.


About the Author

Everett Millman

Steven Cochran

Precious Metals Market Analyst
BS University of South Florida (2002)

A published writer, Steven's coverage of precious metals goes beyond the daily news to explain how ancillary factors affect the market.

Steven specializes in market analysis with an emphasis on stocks, corporate bonds, and government debt. He writes a monthly review of the precious metals markets for

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