After Deutsche Bank, also Commerzbank wants to pass on negative interest rates to its customers. In addition to large companies also smaller companies and wealthy individuals will have to pay interest on their bank balances. That’s what Stephan Engels, financial director of Germany’s second largest bank, said in a conversation with the bank’s analysts.
Like all banks in Germany, Commerzbank is struggling with the ECB’s interest rate policy. To discourage saving the central bank charges negative interest rate on excess reserves of banks, so they have to pass it on to their savers. Nevertheless, many banks are still reluctant, fearing negative publicity and loss of customers. The financial director of Commerzbank expects more problems.
In an interview with Bloomberg he said about the policy of negative interest rates:
“The question of how to get out of this is frankly the most frightening, I think. It is completely unclear how we are going to get out of this drama. That’s why we’re all getting a little more frightened every quarter, because we don’t know how to reverse this situation to a situation in which interest rates can do what they have to do again and that is to steer capital flows in the economy. The negative interest rate does not do this well, I think that is quite clear.”
Negative interest rate
More and more banks in the Eurozone are trying to pass on the cost of negative interest to their customers. Initially only for business customers, but now also for wealthy individuals. Banks pay billions in negative interest each year on their excess reserves. In September, the ECB lowered deposit rates from -0.4% to -0.5%, putting further pressure on the profitability of banks. This also explains why they pass on negative interest rates to savers more often.
“In general, the German banking sector, but also that of a number of other northern European countries, relies heavily on savings as a stable source of funding. If you adjust the prices of these, you have to take into account the behavioral aspect of them. What you want to avoid is that you suddenly scare off a large number of customers, so that your balance sheet starts to shift more than you would like it to. That’s why everyone tries to do it in small steps.
People now understand the message that you have to pass on part of the burden of negative interest to some of the customers. To make a simple comparison. Commerzbank has more than €200 billion in savings. Apply minus half a percent to that as being the cost of that, and you’ll have a good idea why this issue is becoming more and more important every day.”
Banking sector under pressure
Commerzbank issued a profit warning last week as it expects to make less profit this year than last year, partly due to the central bank’s policy. The bank’s share has been under pressure for some time, like that of many other German banks. The entire German banking sector is suffering from negative interest rates, because their earnings model depends on attracting savings. But that is no longer feasible because of the central bank’s interest rate policy.
According to Engels, there should be a new discussion about the central bank’s interest rate policy. According to him, low interest rates have a positive effect on consumption and investment, but negative interest rates bring many undesirable side effects. As a result, people become unsure about their savings and their pensions, which in turn makes them save more and spend less. The central bank’s policy is thereby missing its intended goal. As a result, Commerzbank will have to restructure and reduce costs by cutting jobs.