ECB Negative Deposit Rate Looms - Effects on Retail Rates?

My two cents on negative ECB deposit rates ...

According to many reports, such as this Reuters report, the ECB might cut the ECB deposit rate into negative territory for the first time on 5 June 2014.

[broken link removed] writing in the Irish Independent this week, "this means saving money will cost you". Is David right?

What is the ECB deposit rate?
It is the rate paid, and possibly soon to be charged, by the ECB to commercial banks who park excess reserves at the ECB. In other words, some banks choose to place excess deposits with the ECB rather than lend it out and rather than invest / place the excess deposits elsewhere.

How much in excess deposits are currently parked with the ECB?
According to the FT, 34 billion EUR is parked with the ECB. Peanuts in the greater scheme of things.

What effect will a the potential June rate changes have on banks balance sheets?
If the ECB deposit rate is cut, banks will have to pay for parking excess reserves at the ECB. This will cost banks. However, excess reserves placed with the ECB is tiny in comparison to the amounts paid by banks for liquidity (ELA and LTRO) and the cost of liquidity will decline in tandem if the ECB cut their other 2 rates. Also, the amount of excess reserves parked at the ECB should decline if the rate goes negative so the cost will as a consequence will reduce. Also, Irish banks do not have significant sums of excess deposits at the ECB, rather to the contrary.

Even in isolation, the effect of a negative deposit rate should be minimal to European bank balance sheets.

So will retail deposit rates go negative if the ECB deposit rate goes negative?
The correlation between the ECB deposit rate and retail deposit rates is very weak at best.

Retail deposit rates are currently, in Ireland, typically in-and-around 2%. A cut in the ECB deposit rate, which in isolation will have minimal effect on Irish banks balance sheets, will not cause negative retail deposit rates. It should have little or no impact on retail rates whatsoever.

A cut in the ECB Refinance rate (base rate), might cause Irish banks to cut retail deposit rates, which is happening anyway regardless, but not of a magnitude that would cause retail rates to go negative.

Hi Ciarán

That is a great summary of the situation.

Would you know have retail customers anywhere in the world at any time, had to pay to keep their money on deposit?

Had the Japanese Central Bank negative "wholesale" rates at some stage?

I have never heard of retail customers been charged negative interest rates. I would imagine it is unheard of or extremely rare. The banks will take the hit on the interest margin rather than go down that road. I know negative interest rates were seen in the past couple of years with regard to the Swiss Franc and Danish Kroner but I don't think any domestic bank ever charged their retail customers money to have funds on deposit. I know some banks charged their large institutional customers though.

Hi Brendan,

Denmark and other countries have had negative central bank deposit rates.

Yes, banks, on a very rare basis, have charged customers previously to keep deposits. This has generally only happens at a corporate deposit level and not a retail deposit level.

For example, Bank of New York Mellon, at one stage, charged corporate clients for USD deposits above a certain level and charged for DKK deposits. Charges are generally via fees rather than via a negative rate.

Again, I cannot see the same happening with Irish retail banking customers.

(Sunny - our posts crossed, with similar comments!)

Given the understandably jittery attitude that people have to holding large deposits in banks and financial institutions, I would have thought that if it got to the stage where banks were charging people to save their money, it would be cheaper to keep it under the mattress. Accordingly there would be mass withdrawals and resulting 'runs' on banks etc. Therefore and certainly for ordinary retail accounts, I think banks would have to keep at least neutral if not positive interest rate levels...