In 2020, Irish citizens managed to put nearly €13.4 billion into banks and credit unions, looking to take advantage of savers. This has driven the household deposit total to up to an all-time high of €124 billion. The build-up in these deposits will stay, but banks are continuously looking to pass on charges they face from the European Central Bank.
The reason why banks are looking to charge negative interest is that banks have been paying the European Central bank to hold their excess funds. In a sense, the money earned from these accounts is not being used to lend out to borrowers and generate revenue for the banks themselves. In addition, the ECB rates have become vegetive as a result to encourage more lending in the market to combat the lull in activity in the market due to COVID. This means that you’re essentially paying your bank to hold your savings, but not getting any return by doing so.
Currently, the only organizations that will be paying negative rates would include businesses, pension funds, and credit unions. The rates they are experiencing can range from -0.65% to -1%. For reference, the Bank of Ireland has charged negative rates on deposits since 2016. AIB has been charging large businesses wit more than €3 billion on deposit with large enough accounts.
But soon it won’t just be large organizations and businesses being hit with these negative deposit rates. Banks such as UBS have stated considering lowering the threshold at which it will start imposing these negative rates to nearly half of the deposit amount required before. UBS has lowered the threshold to €280,000 while other banks such as ABN Amra, a Dutch bank, has recently lowered their threshold from €2.5 million to €500,000.
While it is still uncertain whether these negative rates will come to apply to smaller accounts, there is a possibility. There has also been discussion that if savers are paying negative interest rates on their savings, the Government should not be paying them negative Dirt tax on the losses. This curiously brings into discussion the State’s role in this situation. It is unlikely these negative rates will move to smaller accounts in the near future but is rather another unfortunate outcome of the pandemic. These negative rates will likely see a decrease in need as the markets and economies start reopening and becoming invigorated as the pandemic comes to an end within (hopefully) the upcoming months.
Lucas Zhang was a Finance major at Ohio State University. He writes about finance, mortgages, and technology for Irish Mortgage Brokers.