Minimum interest rates on private bank accounts:
Examining the (un)desirability and the possibilities to
prohibit them.
LL.M Thesis
Law and Finance
Student: Tom-Jan Roosenschoon Supervisor: Prof.dr. René Smits
Student number: 12916560 Submission Date: 17-07-2020
Abstract
Two years ago, the first banks in the Eurozone started charging (negative) interest on private accounts and this has become an increasingly common phenomenon ever since. As interest rates on private accounts drop further, more and more savers demand to be protected against debit charges on their bank accounts by means of national legislation. Some countries (e.g. Austria) already have a (de facto) ban on negative interest charges on savings.
This thesis shows that bans of negative interest rates on private accounts (i.e. minimum interest rates) have mainly negative consequences, although they may reduce some liquidity risks. The erosion of bank profitability and the interference with ECB policy are the most important negative consequences. Because minimum interest rates prevent banks from charging debit interest to consumers, the transmission of monetary policy is hampered. This thesis concludes that the ECB can, most likely, ban nationally imposed minimum interest rates. Article 132 (1) TFEU seems to be a sufficient legal basis for this.
Table of content
Abstract ... 2
Chapter 1: Introduction ... 4
Chapter 2: Current state of affairs ... 6
2.1 Austria ... 6
2.2. Belgium ... 9
2.3 Germany ... 11
2.4 The Netherlands ... 13
2.5 Main findings ... 15
Chapter 3: Economic consequences of a ban ... 16
3.1.1. Arguments in favour of a ban. ... 16
3.1.2 Contact with ABN ... 19
3.1.3 Surveys ... 20
3.1.4 Conclusion ... 22
3.2.1 Arguments against a ban ... 22
3.2.2 Interference with ECB policy ... 23
3.2.3 Profitability of banks ... 25
3.3 Conclusions ... 27
Chapter 4: Can the ban be banned? ... 28
4.1 Legal framework ECB’s exclusive competence ... 28
4.2 Legal instruments ... 29
4.2.1 Article 132: ... 29
4.2.2 Article 133 TFEU ... 32
4.2.3 Article 352 TFEU ... 34
4.2.4 Implications for the Eurozone ... 36
Chapter 5: Final conclusions ... 37
Chapter 6: References ... 38
6.1 Bibliography ... 38
6.2 Table of cases ... 39
6.3 Table of legislation ... 40
Chapter 1: Introduction
“Bank interest knows no rest, nor worship, it works on nights, on Sundays and even on rainy days.” - Josh Billings
For many centuries it has been taken for a fact that an individual can increase their amount of money just by putting it in a bank account. Saving money was inextricably associated with receiving interest. Hence, putting money in the bank would increase the nominal value of your capital (in a safe and easy way). As the quote above portrays, this process was considered never ending.
This perception of bank savings would change after the financial crisis. In 2009 the Swedish Riksbank cut its overnight deposit rate to -0.25 percent. Other central banks followed suit. On June 11, 2014 the ECB cut its deposit rate to -0.10%.1 The fact that banks had to pay money to deposit money at central banks did not necessarily mean that positive interest rates on saving accounts disappeared right away. However, in 2018 a bizarre fact came true: The first EU banks started charging interest on private savings accounts.
Because the ECB deposit rate remained below zero, and even dropped to -0.5%, for some banks it was no longer feasible to pay interest on private accounts. Even more so, certain banks decided that they had no other option than charge (debit) interests to remain profitable. Nevertheless, in some EU countries banks cannot charge debit interest because of a de facto ban on negative interest on savings. Austria and Belgium for example have a minimum interest rate on savings accounts. As interest rates on private accounts drop further, more and more savers in the EU demand to be protected from negative interest rates under national regulations. Therefore, my thesis subject becomes increasingly relevant.
In this thesis I’m going to investigate bans on negative interest rates on private accounts and the national barriers to prevent banks from charging them.2 My research question is as follows:
1ECB’s interest rates:
https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html
2 The wordings “ban on negative interest” and “minimum interest rate” will be used interchangeably. The
difference is that a minimum interest rate bans every interest rate below a certain number (assumingly zero or higher), the other bans a rate below zero. A ban on negative interest is per definition a minimum interest rate.
How desirable are national minimum interest rates on private accounts and what can be done to prohibit them?
This question is divided into 3 sub-questions:
-What is the current state of affairs with respect to negative interest rates on private accounts?
-What are the positive and negative consequences of nationally imposed minimum interest rates?
-Is it possible for the EU or the ECB to prohibit minimum interest rates on private bank accounts?
In the second chapter I will study the legal background of minimum interest rates on savings accounts and examine the current interest rates in two countries that have a (de facto) ban on negative interest on savings and two countries that do not have such a ban. I will also discuss the social and political developments in this field.
In the third chapter I will study the (positive and negative) consequences of national minimum interest rates. I will mainly focus on the economic consequences for the financial sector. In the fourth chapter I will examine the possibilities for the EU or the ECB to ban (or disable) national minimum interest rates, as it can be seen as interfering with, and undermining, ECB monetary policy.
I have examined the questions primarily by means of desk-top research. This mainly consists of discussing the existing literature, exploring websites of institutions (e.g. websites of many banks, the ECB and DNB) and researching case law. For (additional) information regarding the current state of affairs on negative interest rates, I have scanned articles of (credible) news sites.3
Furthermore, I have sent out multiple single-recipient questionnaires, of which I have only included one in my thesis.4
3 All internet sources in my thesis are last accessed on July 1, 2020. Consequently, all information (e.g. the
applicable interest rates) is last updated on 1 July.
4 I have sent out four different questionnaires to specific recipients. Only the ABN-AMRO and DNB responded.
Chapter 2: Current state of affairs
In this chapter I will examine the legal background of private interest rates and find out what the current interest rates are in four countries: Austria, Belgium, Germany and The
Netherlands.
I examine these countries, in particular because of interest and practicality. They are
interesting to my topic because Austria and Belgium have a minimum interest rate on saving accounts and a ban on negative interest on private accounts is publicly discussed in Germany and The Netherlands. Examining these four countries enables me to compare two countries with a minimum interest rate to two countries without such a minimum rate. Furthermore, it is practical for me to do my research on these countries because I understand the Dutch and German language.
I decided to examine the interest rates on regular saving accounts (that can be withdrawn on demand and without restrictions) and normal checking accounts, because it enables me to compare the interest rates across countries and banks easily.
I will discuss the countries in alphabetical order:
2.1 Austria
A 2009 verdict of the Oberster Gerichtshof (hereafter: OGH) that prohibits negative interest rates on private savings.5 In a legal dispute between the Austrian Association for Consumer Information (Hereafter: VKI) and the Volkskreditbank (Hereafter: VKB) the Austrian high court ruled that calculating zero interest on a private saving account is not allowed. This means that charging negative interests is also not possible in Austria. The case was as follows: The VKB had a clause in its general terms and conditions that stated that an interest rate of zero was the minimum limit of the (flexible) interest rates on saving accounts.6 The VKI thought this clause could turn out disproportionally badly for consumers and that is was therefore in violation of paragraph 879 (3) of the Austrian civil code (the ABGB). This paragraph states that a provision in general terms of conditions or in a contract (that does not specify the main service that is provided) is void if it grossly disadvantages one party, taking
5 Volkskreditbank v Verein fur Konsumenteninformation (5 Ob 138/09), Obester Gerichtshof (Austria),
judgement of 13 October 2010, p.2.8.
all the circumstances of the case into account. Eventually the case came before the highest Austrian court.
The verdict of the High court (in paragraph 2.8) states that the purpose of a savings account is not to improve the liquidity of a bank but to help the consumer to make profits and to increase their capital. Charging zero interest (or negative interest) contradicts this view of a savings account. Zero interest was ruled as very disadvantageous for the consumer and the clause in VKB’s general terms and conditions was therefore in violation of paragraph 879 (3) of the Austrian civil code. The clause was ruled as void.
It has to be acknowledged that this verdict only applies to saving accounts, and not to
payment accounts. As long as this verdict is not withdrawn or contradicted by the high court, the Austrian savers don’t have to fear for negative interest rates. One can wonder how long this verdict is going to remain in force. The situation in 2009 was, obviously, completely different from the present day. Negative ECB interest rates had never existed and it’s far-fetched to assume that the OGH could have foreseen that the ECB (and market) interest rates could drop substantially below zero, let alone as far as it did. The OGH could not have known its verdict could have such disruptive consequences.
Nevertheless, the Austrian minister of finance, Gernot Blümel, insinuated that the minimum interest rate will stay prevailing law by (clearly) stating that private savers are protected against potential nominal losses due to the legal situation.7 There are no signs that this will change in a short amount of time.
The effects of the verdict, combined with the effects of a negative deposit rate, can be found in the following table, showing the interest rates of the 5 biggest Austrian banks:8
7 Gernot Blümel, letter to the president, l6 February 2020,
https://www.parlament.gv.at/PAKT/VHG/XXVII/AB/AB_00288/imfname_780671.pdf
Bank Assets x billion Interest rate savings account
Interest rate checking account
Erste Group bank9 236.79 0.02%
(Infants: 0.125%)
0.01%
Raiffeisen
Zentralbank10 140.12 Euribor dependent, at least 0.01% 0.00%
11 Bank Austria (Unicreditbank) 99.03 Euribor dependent, at least 0.01%12 0.00%13 Bawag P.S.K14 44.70 0.02 % 0.0625% Raiffeisen Landesbank Oberosterreich15 34.77 0.01% (+ 0.49% loyalty bonus for infants under 10)
0.00%
The interest rates on savings accounts reflect the circumstances described above: The interest rates on private saving accounts are all close to, but above, zero. Because the Euribor rates are currently well below zero, three of the 5 banks pay 0.01% interest on (regular) savings. The other two banks pay 0.02%.
Because the verdict of the High Court only applies to savings accounts, checking accounts do not have minimum interest rates. Consequently, 3 out of 5 banks pay no interest on these accounts. However, (these) Austrian banks do not charge negative interest on their checking accounts yet. This might have to do with the fact that negative interest charges could easily be avoided by transferring money from a checking account to a savings account.
9https://www.sparkasse.at/erstebank/privatkunden/
10
https://www.raiffeisen.at/de/privatkunden/sparen/wissenswertes-zum-thema-sparen/so-kommt-s-zu-den-zinsen.html
11 This can be different region (0 is standard).
12 https://shop.bankaustria.at/privatkunden/sparen-und-veranlagen/sparen/sparkonto-24h.aspx (it’s also possible
to get a fixed rate of 0.2%).
13 https://www.bankaustria.at/files/Kontopreisblatt.pdf 14 https://www.bawagpsk.com/BAWAGPSK/PK/services/270526/alle-entgelte-und-konditionen-im-ueberblick.html 15 https://www.raiffeisen.at/ooe/oberes-innviertel/de/meine-bank/schalteraushang/_jcr_content/root/responsivegrid/tabaccordioncontaine/tabAccordionElements/tabaccordio nelement_2086307275/items/downloadlist.download.html/0/Preisaushang.pdf
2.2. Belgium
By a royal decree from 1993 (amended in 2013) Belgium has also banned negative interest charges on (certain) savings accounts.16 Firstly, it has to be made clear that, in accordance with the tax code of 1992, Belgian citizens enjoy tax benefits when they put their savings in a (regulated) bank account. In order to enjoy these tax benefits, the bank account has to meet several criteria. To a certain extent, interest received will then be exempted from income tax. Most Belgian banks, and especially the biggest banks, offer these regulated savings accounts. Article 2 of the royal decree of 1993, implementing the tax code of 1992, states that the holder of such a savings account may not be charged debit interest.17
Because the decree also states that these regulated accounts have to offer a base interest and a loyalty bonus (to meet the requirements), it seemed probable that an interest rate of exactly 0% was also not allowed. However, until 2015 it was not clear what the minimum interest rate was. In 2015, the former Belgian minister of finance, Johan Van Overdtveldt, decided that the minimum interest on regulated savings account should be 0.11%: 0.01% base interest + 0.10% loyalty bonus on top of the amount of money that was in the account all year round.18 At that time, the lowest interest rate in Belgium (on private savings) was 0.20%.
In the years after this decision the ECB cut its deposit rate further below zero and banks lowered their interest rates further too. However, because most Belgian banks were not
willing to let regulated savings accounts go (by changing them to accounts that don’t meet the criteria), 0.11% became the (artificial) interest rate on most savings accounts. Since the royal decree did not allow interest rates drop further, this reduced profitability of the Belgian
financial sector. Various influential Belgians in this sector, for example the CEOs of KBC and ING Belgium, have called for the abolishment of the minimum interest rate.19 Because the dissolution of the minimum interest rate cannot count on (or even close to) sufficient support in society or parliament, this has not happened and is not likely to happen soon. Even Pierre
16. Koninklijk besluit tot uitvoering van het wetboek van de inkomstenbelasting 1992 (Belgian Royal Decree)
[1993], afdeling 2, art, 2.
17 Artikel 2 Koninklijk besluit: “Aan de titularis van een spaardeposito mag geen debetrente worden gevraagd.” 18 The minimum interest rates have not been published in an official document. The decision has been published
by the VRT and is later confirmed by the minister of finance (to other newspapers). First source: Michaël Van Droogenbroeck ‘0,11% is minimumrente voor spaarboekjes, VRT, 27 March 2015,
https://www.vrt.be/vrtnws/nl/2015/03/27/0_11_is_minimumrentevoorspaarboekjes-1-2284999/
19 Nieuwsblad editorial ‘ING-topman wil minimumrente afschaffen, maar krijgt meteen tegenwind uit politieke
hoek: “Blijf van het spaargeld van de mensen af” 1 August 2019 https://www.nieuwsblad.be/cnt/dmf20190801_04538328
Wunsch, head of the Belgian central bank, is not necessarily in favour of abolishing this minimum rate, even though it worsens the profitability of Belgian banks.20
The result (of this) is that the 5 biggest banks all pay exactly the same amount of interest on regular private accounts:
Bank Assets x billion21 Interest rate savings
account Interest rate checking account
KBC Groep 304.02 0.01% + 0.1% loyalty bonus22 0.00% 23 BNP Paribas Fortis 277.65 0.01% + 0.1% loyalty bonus24 0.00% 25 Belfius 180.98 0.01% + 0.1% loyalty bonus26 0.00% 27 ING België 151.82 0.01% + 0.1% loyalty bonus28 0.00% 29 Crelan 92.730 0.01%+ 0.1% loyalty bonus31 0.00% 32
It is worth noting that the five biggest banks in Belgium all offer regulated savings accounts, even though the minimum interest rate can be avoided by offering non-regulated savings accounts. The decree only applies to certain accounts, but the Belgian banks (apparently) feel the need to keep offering these accounts, even though these accounts are not profitable in the long term (more on this in paragraph 3.2.3). However, some smaller banks have decided to stop offering these kinds of savings accounts.
20 Wouter Vervenne, ‘Wunsch waarschuwt voor risico van negatieve spaarrente’ De Tijd, 16 November 2019,
https://www.tijd.be/dossiers/finance-avenue-2019/wunsch-waarschuwt-voor-risico-van-negatieve-spaarrente/10182745.html 21 https://www.relbanks.com/europe/belgium 22 https://www.kbc.be/particulieren/nl/product/sparen/spaarrekeningen/spaarrekening.html 23 https://multimediafiles.kbcgroup.eu/ng/PUBLISHED/KBC/PDF/Tarieven/kbc-tariefmededeling.pdf 24 https://www.bnpparibasfortis.be/nl/Sparen-en-beleggen/Ontdek/Ons-aanbod/Spaarrekeningen?axes4=priv 25 https://www.bnpparibasfortis.be/rsc/contrib/document/1-Website/5-Docserver/BNP/F01400N.pdf 26 https://www.belfius.be/retail/nl/producten/sparen-beleggen/sparen/index.aspx 27 https://www.belfius.be/imagingservlet/GetDocument?src=mifid&id=TARIFEUR_NL 28 https://www.ing.be/nl/retail/daily-banking/savings-accounts/with-high-base-rate#:~:text=De%20basisrente%20bedraagt%200%2C01,de%20hoogte%20via%20hun%20rekeninguittreksels. 29 https://www.ing.be/nl/business/daily-banking/current-accounts/payment-account 30 https://corporatefinanceinstitute.com/resources/careers/companies/top-banks-belgium/ 31 https://www.crelan.be/nl/particulieren/product/spaarrekeningen 32 https://www.crelan.be/assets/2020-01/Tarieven_priv%C3%A9_N_OL_6.pdf
Furthermore, it is interesting to see that Belgian banks, just like Austrian banks do not charge debit interests on checking accounts. This could, once again, be explained by the fact that interest charges could easily be avoided by transferring money to regulated savings accounts.
2.3 Germany
Unlike Austria and Belgium, Germany has no minimum interest rate on savings accounts. However, German banks are generally not allowed to charge negative interest to clients with existing deposit accounts. On January 26,2018 the Landesgericht (regional court) in
Tübingen decided that banks cannot “unilaterally introduce” a negative interest charge if it was not agreed in the contract.33 Volksbank Ruetlingen introduced a clause in its general terms and conditions that stated that it could charge negative interest on certain types of investment accounts. Similar to the Austrian case (discussed above) a consumer protection association thought this clause was too disadvantageous for individuals and considered it in violation with the German civil code (the BGB). Paragraph 307 of the German civil code states that a provision in the general terms and conditions is void when it is unreasonably disadvantage to the contractual partner (in casu the consumer).
Because the Volksbank did not differentiate between contracts that were signed before the change of the terms and conditions and those that were singed after, the clause was
unreasonably disadvantage (to certain consumers) and was ruled void.34 Debit interest rates can only be charged if terms and conditions already explicitly facilitated this possibility when the bank account was opened (and thus the contract was signed).
When new accounts are opened negative interest can be charged and dozens of German banks already make use of this possibility (in order to scare away new savers).35 Many banks have started charging interest on deposits that exceed 100,000 euros, but it is not uncommon for German banks to start charging interest on the first euro that is put in the bank.
When banks started charging negative interest on savings the discussion about banning this erupted. Multiple newspapers and influential politicians pleaded in favour of outlawing
33 Volksbank Ruetlingen v Verbraucherzentrale (4 O 187/17), Landesgericht Tübingen (Germany), judgement of
26 January 2018, p15.
34 Volksbank Ruetlingen (4 O 187/17), p.15.
negative interest rates for individuals. The prime minster of Bavaria Markus Soeder for example stated that Germany needs a law that bans banks from passing negative interest rates on to retail clients.36 Even though the German minister of finance Olaf Scholz has (politely) asked German banks not to pass on interest rates to smaller savers and still “does not rule out such a ban”, there are no concrete signals a ban will be introduced.37
The following table shows the 5 biggest banks that offer savings accounts:38
Bank Assets x
billion39 Interest rate savings account Interest rate checking account
Deutsche Bank40 1880 0.00% until 100.000
-0.5% 100.000 and above (for newly opened accounts).
0.00% until 100.000 -0.5% 100.000 and above (newly opened accounts)
Hypovereinsbank
(Unicreditbank)41 938 0.01% (Possibly negative) 0.00% (Possibly negative)
Commerzbank42 513 0.00%
(Possibly negative)43 0.00% (Possibly negative)
Landesbank Baden-Württemberg44
287 0.001% 0.00%
Norddeutsche
Landesbank45 205 0.01% untill 1500 0.00% 1500 and above 0.00%
There is not much difference between interest rates on savings and checking accounts. The negative charges are not exclusively charged on either savings or on checking accounts. At first glance it seems rather strange that Hypovereinsbank and Commerzbank both do not regularly charge debit interest but include a possibility to charge negative interest to wealthy
36 He pleasds to outlaw negative interest until 100,000. See Piotr Skolimowski, ‘Bavaria’s Leader Wants
Germany to Outlaw Negative Rates’ Bloomberg, 21 August 2019
<https://www.bloomberg.com/news/articles/2019-08-21/bavaria-s-leader-wants-germany-to-outlaw-negative-rates>
37 Florian Naumann, ‘Angst vor Strafzinsen: Scholz richtet „sehr ernsten Appell“ an Banken - und „hofft“ nun’,
Merkur, 20 November 2019 < https://www.merkur.de/wirtschaft/negativzinsen-ezb-scholz-richtet-sehr-ernsten-appell-an-banken-und-hofft-nun-zr-13007634.html>
38 DZ Bank and KFW Bankgruppe, respectively the third and fourth biggest banks in Germany do not offer
private accounts. The seventh biggest bank, Bayerische Landesbank, does not offer savings accounts.
39 https://corporatefinanceinstitute.com/resources/careers/companies/top-banks-in-germany/
40 https://www.deutsche-bank.de/dam/deutschebank/de/shared/pdf/ser-konditionen_preise-preisaushang.pdf 41 https://www.hypovereinsbank.de/hvb/footer/geschaeftsbedingungen-konditionen
42 https://www.commerzbank.de/portal/media/efw-dokumente/preisaushang.pdf
43 Commerzbank and Hypvoereinsbank be charge interest to wealthy savers, however this is not standard
practice.
44
https://www.bw-bank.de/content/dam/myif/bwbank/work/dokumente/pdf/preise-leistungen/preisaushang-bwb.pdf?n=true
savers (on individual basis) in their terms in conditions. This is likely a response to the verdict of the Landesgericht in Tübingen. Because the banks include the possibility of charging negative interest in their terms in conditions, they can charge wealthy individuals interest when they see fit (as long as they opened an account after they included the possibility in its terms and conditions). If they would not have included this in the contract or terms and conditions, then those relatively new clients could not be charged debit interest in accordance with the verdict of LG Tübingen.
2.4 The Netherlands
Just like in Germany there is no minimum interest rate in The Netherlands. But unlike
Germany there is (legally) nothing that prevents banks from charging (negative) interest rates to existing customers. Multiple Dutch banks have started, or will start, charging negative interest rates. This mainly applies to bigger Dutch banks and they often start charging debit interest from 1,000,000 euros and up. Nevertheless, some smaller Dutch banks (Triodos and Evi) will also start charging debit interest, even on amounts of 100,000 and above. However, no (Dutch) bank charges debit interest on savings below 100,000 yet, even though this is not banned.
Similar to Germany a lot of resistance arose when banks started introducing negative interest rates for individuals. A survey of 6300 Dutch citizens undertaken by the consumer association (Consumentenbond) showed 93 percent to be in favour of a ban on negative interest rates.46 Some political parties, such as the Socialist Party, are also embracing the idea of a national ban. At first, the Dutch minister of finance, Wopke Hoekstra, did not rule out the possibility of a ban on negative interest. After asking the Dutch national bank for advice he concluded that such a ban would not be a good idea.47
The biggest banks one can open a savings account in:48
46 Joyce Donat ‘Brandbrief om verbod negatieve spaarrente’ De Consumentenbond, 29 November 2019,
https://www.consumentenbond.nl/nieuws/2019/brandbrief-om-verbod-op-negatieve-spaarrente
47 Wopke Hoekstra, ‘Kamerbrief negatieve spaarrente’ 5 December 2019
https://www.rijksoverheid.nl/documenten/kamerstukken/2019/12/05/kamerbrief-negatieve-spaarrente
Bank Assets x billion49
Interest rate savings account Interest rate checking account ING NV 50 1003 0.01% under 100.000 0.00% 100.000-1 mil -0.50% 1.000.000 and above 51 0.01% untill 100.000 0.00% 100.000-1 mil -0.50% 1.000.000 and above. Rabobank 52 799 0.01% untill 1.000.000 -0.50% 1.000.000 and above. 0.00% untill 1.000.000 -0.50% 1.000.000 and above. ABN-AMRO 53 469 0.00% untill 2.500.000 -0.50% 2.500.000 and above 0.00% until 2.500.000 -0.50% 2.500.000 and above Volksbank54 73 ≥ 0.01% untill 25.000 ≥ 0.00% 25.000-100.00055
No negative interest yet
0.00%-0.01%56
NIBC Bank 28 0.15%
(+ Loyalty bonus)57 No payment account offered58
A possible explanation for the fact that Dutch banks usually have a higher threshold of charging debit interest to consumers than most German banks, is that these charges apply to everyone (so to existing consumers too). The negative interest rates of German banks are not as effective as the Dutch rates because they do not apply to existing clients. The German negative interest rates have the purpose to scare away potential consumers.59
The result of the high threshold is that just a small fraction of the Dutch savers (e.g. around 0.1% in the case of ING) will be affected by debit charges.60
It can also be observed that checking and savings accounts have similar interest rates. The Dutch banks don’t make a great distinction between savings and checking accounts. Multiple banks (ING and ABN) have one interest rate for all (regular) accounts. In order to calculate the calculation whether the limit (of 1,000,000 for example) has been reached and an
49 https://corporatefinanceinstitute.com/resources/careers/companies/top-banks-in-the-netherlands/ 50 https://www.ing.nl/particulier/voorwaardenwijziging/index.html
51 https://www.ing.nl/particulier/sparen/tarieven/wijziging-spaarrente/index.html 52 https://www.rabobank.nl/particulieren/sparen/rentewijziging/
53 https://www.abnamro.nl/nl/prive/rente/actuele-rente.html
54 Since Volksbank is the mother bank of multiple Dutch banks, the interest rates vary (a bit).
55 See the 2019 Annual report of Volksbank: https://www.devolksbank.nl/investor-relations/jaarverslagen 56 SNS Reaal has 0.01%, ASN 0.00%-0.01.
57 https://www.nibcdirect.nl/rentes/nieuwe-rentetarieven/ 58 https://www.bankenoverzicht.nl/bank/NIBC-Direct/betalen
59 This can be logically assumed because existing consumers cannot be charged debit interest.
individual has to pay negative interest all accounts (both checking and savings) must be added together. The Dutch government also does not differentiate between checking and savings accounts for tax purposes anymore (unlike Belgium and Austria).61 On that basis, a potential Dutch ban on negative interest which would apply to savings accounts (similar to Austria and Belgium) seems illogical.
2.5 Main findings
In this chapter I examined the interest rates and the legal background of those interest rates on private accounts in four countries. Austria has a minimum interest rate on all savings accounts because of a 2008 verdict while Belgium has a minimum interest rate on regulated savings accounts because of royal decree in 1993. I have found that the main banks in these countries offer relatively high and very similar interest rates (and in the case of Belgium they all offer the same rates). Furthermore, I have found that these banks also do not charge debit interest on checking accounts, although this is not prohibited. A possible explanation for this is that this would be ineffective because of the possibility to switch to a savings account. German banks can, unlike Dutch banks, only charge negative interest rates to new clients. This is likely the reason why the threshold of paying (negative) interest is generally lower in Germany than in the Netherlands.
61 Austria has a Bausparprämie. A bank account containing savings that have the purpose to buy a home is
Chapter 3: Economic consequences of a ban
In this chapter I will examine the economic consequences of a nationally imposed ban on minimum interest rates, more specifically a ban on debit interest charges. I will mainly focus on the consequences for the financial sector. The consequences of negative interest rates for our society as a whole are, although interesting, beyond the scope of my thesis. The starting point in finding the consequences of a ban is examining the (economic) arguments voiced in favour and the arguments voiced against such a ban.
Firstly, I will look at the economic arguments in favour. These arguments focus on the potential negative consequences of negative interest rates on individual accounts. A problem (for the financial sector) could arise when consumers decide to withdraw or move their funds in large numbers. This could even be a threat to the financial stability.62 According to The Dutch (national) Bank (hereafter: DNB) it is not possible to draw general conclusions about behavioural effects on customers yet, because negative interest charges are a recent
phenomenon and mainly relate to large deposits.63 Research has found that corporations are fairly tolerant to interest charges (which have existed for a while), and no significant decrease in deposit funding has been found.64 Because such an empirical research cannot be undertaken on private accounts yet, I will review the existing literature in order to evaluate how great the liquidity risk is.65 A ban on negative interest charges would lower the risk of these liquidity problems, but other problems might arise. I will discuss these potential negative consequences in the second part of this chapter. In that part I will mainly focus on the considerations of DNB (why a ban would not be a good plan). I will try to assess whether these potential problems pose a risk to the financial sector.
3.1.1. Arguments in favour of a ban.
Most arguments in favour of minimum interest rates on saving accounts are based on morals, as opposed to arguments against minimum interest rates, which are mainly economically
62 De Nederlandsche Bank, ‘Overwegingen rond negatieve spaarrentes’ [2019]
<https://www.eerstekamer.nl/overig/20191205/bijlage_1_overwegingen_rond/document3/f=/vl47ez21zgye_opg emaakt.pdf> p.2.
63 DNB, ‘Overwegingen rond negatieve spaarrentes’ [2019] p.2.
64 Carlo Altavilla Lorenzo Burlon, Mariassunta Giannetti & Sarah Holton ‘Is there a zero lower bound? The
effects of negative policy rates on banks and firms.’ [2019] ECB Working Paper Series, 2289. P.6.
65 Van Lanschot and ABN are among the few banks that have are already charging existing consumers before 1
based.66 Some people might argue that negative interest charges are theft because they have always received interest. Other arguments are more substantiated: The Dutch Socialist Party stated that free market forces in the financial sector have unwanted consequences and for many years savers have noticed too little of the profits banks made.67 Although this may be true, I am not going to elaborate on these arguments, because they are mainly subjective and do not relate to economic effects to the financial sector.
As I have stated before, the most commonly voiced economic argument in favor of minimum interest rates is that negative interest rates on savings can cause problems for the liquidity of banks. This way they could pose systemic risks to the financial sector. Pierre Wunsch, head of the Belgian central bank, is for that reason not (necessarily) in favor of abolishing the
Belgium minimum interest rate of 0,11%. He finds negative interest rates on private savings accounts “counterproductive” because “a financing problem may arise because customers reduce their deposits”.68 DNB also warns that liquidity problems might arise, but thinks this scenario is unlikely: “There are no signs of a large outflow of deposits with banks that have started to use negative savings interest rates or have announced that they will do so.”69
Firstly, it has to be acknowledged that banks are not forced to lower their interest rates below zero when a country has no ban (or a ban is lifted). If a bank concludes that there is a serious chance that it will face liquidity problems when it starts charging debit interest on private accounts, it should not (and does not have to) do this. But because negative interest rates on individual accounts are such a new phenomenon (and not much is known about the behavioral effects on consumers yet), it might be very hard for banks to assess whether negative interest charges will lead to liquidity problems. By examining the existing literature (and other research), I try to assess the likeliness of this to happen.
For most banks a very large percentage of its total assets and liabilities consist of consumer deposits. In the case of ING for example had 892 billion (2019) in total assets and the customer deposits amount to 64% of this number (i.e. 574 billion).70 Therefore, it is
66 In my research I have found this to be the case for the Western world, but not for all parts of the world. In the
conservative variant of Islamic banking, giving and receiving interest is not permitted. Charging interest is regarded as morally wrong. In this thesis I will focus on the discussion on interest in Eurozone countries.
67
https://www.sp.nl/opinie/mahir-alkaya/2020/wettelijk-verbod-op-negatieve-spaarrentes-is-goede-stok-achter-deur
68 Vervenne (n 20).
69 De Nederlandsche Bank, ‘Overwegingen rond negatieve spaarrentes’ [2019] p.2.
70 ING Group Annual Report 2019
reasonable to assume liquidity problems will arise when consumers withdraw or move their funds in large numbers. I distinguish four ways in which this can happen:
1-Savers withdraw cash and invest or spend it.
2-Savers withdraw cash and store/hoard it themselves.
3-Savers switch to other banks that still have positive interest rates. 4-Savers withdraw funds to pay off existing debts.
The first alternative is, from the perspective of the ECB, (to a certain extent) very welcome. One of the main reasons the ECB cut its key interest rates below zero, is to incentivize companies and individuals to invest and spend money.71 This will bring the inflation rate closer to the desired level (close to, but below 2% over the medium term),72 and would boost economic growth.
However, if too many savers withdraw funds to invest, banks will experience liquidity problems. Private deposits are important for the liquidity of banks considering the fact that approximately 80% of bank deposits come from consumers and only 20% from
corporations.73
The second alternative would distort ECB policy because transmission is hampered and could also bring banks into trouble.74 If interest rate charges exceed the costs of hoarding cash, it can be profitable for individuals to withdraw cash and store it themselves. The ECB finds, so far, no evidence that this will happen in the EU. 75 Until the interest rate charges exceed the costs of hoarding cash this would only happen “as a result of some form of money illusion or other behavioural bias.”.
When EU banks started charging negative interest (on corporate accounts), almost no outflow of cash was observed.76 The same pattern applies in Switzerland. 77 However, this might be
71 See paragraph 3.2.2
72 ECB, ‘The definition of price stability’
<https://www.ecb.europa.eu/mopo/strategy/pricestab/html/index.en.html>
73 Hans Brits, Ria Joerink & Jacob Dankert. De Nederlandsche Bank. Veranderen voor vertrouwen: Lenen
sparen en betalen in het datatijdperk, DNB-rapportage, p.15.
74 See paragraph 3.2.3.
75 Miguel Boucinha & Lorenzo Burlon, ‘Negative rates and the transmission of monetary policy’ [2020] ECB
Economic Bulletin, Issue 3/2020, chapter 2.
76 Altavilla (n 64), p.6. (Especially in sound banks).
77 Jackson Harriet, ‘The international experience with negative policy rates, [2015] Bank of Canada Staff
different when banks charge interest on saving accounts because it is easier and cheaper for individuals to store cash. 78
Thirdly, individual banks can face liquidity problems if many savers switch to competing banks. If a bank charges debit interest it can be profitable to switch to a bank that still pays interest. If interest rates drop further the situation might arise where almost no bank wants to pay interest anymore. In that situation it would still be an option to switch to a foreign bank, that is legally obliged to pay interest on savings (e.g. an Austrian bank).79 For example: a consumer with 1 million euros can save 4700 euro per year by switching from Deutsche Bank to Erste Bank.80. Although it can be profitable, research found that savers are, generally, reluctant to switch banks, and are even more reluctant to switch to out-of-state banks.81 DNB research showed that the likelihood of an (Dutch) individual to switch banks is only 7%. The fact that individual savers are not likely to switch banks (now), does not mean that
individual savers would not change banks if they are charged debit interest. The psychological effects of having to pay negative interest might trigger savers to switch banks.82
3.1.2 Contact with ABN-AMRO
On June 7, I have contacted an investment manager at ABN-AMRO Mees Pierson (via-e-mail) to inquire whether the debit interest charges (that began on 1 April 2020) have already resulted in a significant loss of customers.83 Nine days later he responded that, in his
experience, the customers that were affected by those charges were generally understanding. He did not experience a significant outflow of funds. This can be explained by the fact that ABN’s main competitors (other big Dutch banks) do not offer much better interest rates (and also start(ed) charging debit interest). A second possible explanation is that investing in financial markets is not as attractive right now considering they are “burning”.
78 Andreas Jobst & Huidan Lin, ‘Negative Interest Rate Policy (NIRP): Implications for Monetary Transmission
and Bank Profitability in the Euro Area’ [2016] IMF working paper, p. 9.
79 Not taking banking fees in consideration.
80 See chapter one: Erste pays 0.02% interest, DB -0.5% after the first 100,000 (assuming it’s a relatively new
consumer), The calculation is 200 - -4500= 4700.
81 Brits (n 73) p.18.
82Banks that pay no interest, charge account fees so many savers already make losses on their private savings..
However, surveys indicate that negative interest rates would trigger a bigger reaction.
83 After calling ABN-AMRO on numbers listed on their website did not lead to a satisfactory result, I came in
contact with the manager via one of my family members (who is one of his clients). Many of Mees Pierson’s wealthy clients are affected by interest charges. The (e-mail) contact with the bank is important for my research because ABN-AMRO is the only big Dutch bank that could be able to provide any empirical results on the topic since it was only one to start charging debit interest (before July).
He also pointed out that, as an alternative, ABN started offering a safe investment product, which (under normal circumstances) guarantees to reimburse your nominal deposit after a certain amount of years.84 Banks offering alternative investments, that have characteristics of saving accounts but do not charge debit interest, might prevent banks from losing its
customers. It is, however, not possible to draw general conclusions yet.
The experiences of this investment manager are consistent with DNB findings that “there are no signs of a large outflow of deposits with banks that have started to use negative savings interest rates or announced to do so”.85 They are also consistent with the (empirically researched) consequences of debit charges on corporate accounts.
3.1.3 Surveys
In 2019, Efendic and others did a (theoretical) study on the impact of negative interest rates on financial decision-making behaviour. American participants of the experiment were asked how they would react in the hypothetical scenario that all banks would start charging debit interest on their deposits.86 They were given the choice to either accept the negative interest charge or to withdraw their funds. The overall result of the experiment was that 52.88% would accept an interest rate of -0.3%, 38.14% would accept an interest rate of -0.6% and 29.49% would accept an interest rate of -1%. 87 On average, around 40% of savers would tolerate some sort of interest charge.
Of the participants not accepting the charge, 41.06% would invest the money, 35.90% would continue saving the money “in some other way”, 22.45% would use the money to pay off debts and only 0.64% said that they would spend the money.
Based on the results of their experiment, Efendic et al concluded that individuals have a high tolerance towards negative interest rates, especially when it comes to their savings.
Individuals will value the safekeeping function of bank deposits and would tolerate a small
84See the brochure of ABN’s new hybrid investment-savings account:
https://www.abnamro.nl/nl/media/286914%20AAPB_2_brochure_Beleggen_FIX-Plus%20Notes_v3_tcm16-55689.pdf
85 De Nederlandsche Bank, ‘Overwegingen rond negatieve spaarrentes’ [2019] p.2.
86 The government hypothetically imposed banks to charge negative interest rates. The survey made clear that
this was for good reason, see Emir Efendić, Catherine D’Hondt, Rudy De Winne & Olivier Corneille, ‘Negative Interest Rates May be More Psychologically Acceptable than Assumed: Implications for Savings’ [2019] p.10.
87These are the average result of his second experiment 2. The main difference with experiment 1 is that the
debit interest charges take place at the end a time-horizon (instead of granting a choice when this happens). I focus on the results of experiment 2 because this experiment reflects the circumstances of normal interest charges better, see Efendic p.16.
loss. Furthermore, research suggests that this safekeeping role is even more appreciated in economic uncertain times.88 This would imply that during the Corona crisis the acceptance rate might be even higher than 40%. Please note that in the experiment my third alternative (switching banks) was not possible. If this would be included as possibility, the percentage of people that accept negative charges could very well be lower.
In another survey in 2019, the Dutch Consumer Association asked 7000 panellists what they would do if a bank charges debit interest.89 In this survey the option to switch banks was included. Only 16% percent of the panellists replied that they would keep the money in the bank. Meanwhile a higher proportion replied that they would switch banks or hoard the money at home: Respectively 23% and 20% respectively. Only 10% answered they would invest the money.
In comparison to the study of Efendic, less people would accept the debit charge. The fact that the option of switching banking was included, might (partly) help explain this difference. Although Efendic concluded that the acceptance rate of negative interest is surprisingly high, my own conclusions are not as positive: When asked about negative interest, most people responded that they would not tolerate it (in both surveys). If banks started charging debit interest (without exemption threshold), and the general level of the public’s tolerance for this was at a similar level to my findings, then they would definitely run into liquidity problems. It is, however, questionable whether people would actually act on their words if debit charges become reality.90 We simply do not know this yet.
Furthermore, as long as banks keep exempting relatively high amounts of savings from negative interest charges, liquidity risks will be limited. Only a small number of depositors would face interest charges (e.g. in the case of ING 0,1%). This will greatly decrease the chance of a bank run that would lead to liquidity problems. Although some German banks have decided to charge interest without exemption threshold (on new savers), it is still very rare. DNB suggests that we can reasonably expect banks not to charge debit interest below 100,000 any time soon.91
88 Altavilla (n 64), p.12.
89 Rien Meijer ‘Negatieve spaarrente: wat kun je doen? ’De Consumentenbond, revised on 13 July 2020,
https://www.consumentenbond.nl/sparen-en-beleggen/negatieve-spaarrente
90 Considering people are not likely to switch banks and the first signs do not show an outflow of customers. 91 DNB ‘Overweging rond negatieve spaarrentes’ p.3.
3.1.4 Conclusion
By far the most compelling reason to ban negative interest rates on private accounts is that they may lead to liquidity problems in the financial sector. However, it is very questionable whether a national ban would be necessary to mitigate these risks. Banks should be given the responsibility to assess the risks themselves and respond to this accordingly. For example, by applying a high exemption threshold.
Most individuals claim that they would stop saving at the (particular) bank if it starts charging debit interest to them. First indications are that will not happen as much as the surveys would suggest. Because we have almost no experience with this in practice, we cannot draw any general conclusions on this. As long as banks keep the threshold exemption of charging debit interest high enough, the liquidity risks will be limited.
3.2.1 Arguments against a ban
In a small paper titled “Considerations around negative savings interest rates” DNB
summarizes the (negative) consequences of a national ban on interest.92 The paper covers, as far as I am aware of, all the economic considerations against a minimum interest rate. At the end of 2019 Wopke Hoekstra requested DNB to investigate what the consequences would be of a national ban on negative interest. DNB concluded that a national ban would mainly have negative consequences. These are as follows:
1: A ban undermines freedom of contract in a market economy. Banks should be allowed to set their own rates and are responsible for their own risk management. From both a micro and macro-prudential point of view, intervention in this price-setting mechanism with a ban is disruptive and can set a precedent that is, according to DNB, “undesirable”.
2: A ban on negative interest rates on savings and current accounts interferes with ECB’s monetary policy because it prevents banks from passing on falling interest rates to customers. This has negative consequences that will be discussed later in this chapter.
3: A ban can erode the profitability of banks when very low market interest rates become long-term in nature. This can lead to financial stability problems that are relevant for both micro and macro-prudential supervision.
4: A ban will bring great uncertainty because the consequences of such a ban cannot yet be foreseen. These consequences will also depend on the choices that other EU Member States
make, and this is also uncertain.
It is, in my opinion, reasonable to assume that it would be less of a risk if all members states took the same legal position on negative interest rates on private accounts. This would mitigate the risk of savers switching to foreign bank en masse, and thus causing a liquidity outflow in some countries (as described in 3.1.1). It is also true that the effects of a ban are not yet known, because a comparison between countries that have minimum interest rates, and countries that do not have them could not yet be made. However, DNB forgets to
(clearly) mention the fact that allowing banks to charge debit interest also brings uncertainty. This argument goes both ways.
Because the first and fourth argument are quite straight forward, I will not discuss them any further. The second and third argument are (a bit) more complicated, and arguably more important. I will examine and discuss them in the remainder of this chapter.
3.2.2 Interference with ECB policy
A minimum interest rate on private savings would make E(S)CB’s monetary policy less effective. If banks cannot transmit negative interest to their private customers, this would have effects that contradict the purpose of the cuts of ECB’s key interest rates.93 The setting of interest rates is one ECB’s main tools to implement monetary policy.94 In accordance with Article 127 (1) of the treaty on the functioning of the European Union (hereafter: TFEU), the primary objective of monetary policy of the E(S)CB is to maintain price stability. It aims for an inflation rate below, but close to, 2%.95 Because the inflation rate in the Eurozone is significantly below this (i.e. 1,4% in 2019 and is expected to be 0.4% in 2020)96 the ECB wants to increase inflation by incentivizing companies and individuals to invest and spend money. There are two ways this objective will less likely be achieved when countries ban negative interest charges:
-I have (briefly) discussed the direct effects earlier in this chapter. When banks start charging negative interest to consumers, consumers are more likely to withdraw funds to invest or spend it. This will raise the inflation rate and boost the growth of the economy. Obviously,
93 ECB’s key interest rates are the deposit facility rate, the marginal lending rate and the fixed rate for main
refinancing operations.
94 European Central Bank Guideline (EU) 2015/510 on the implementation of the Eurosystem monetary policy
framework [2014] L91/3.
95 ECB, ‘Monetary policy’ (no date) https://www.ecb.europa.eu/mopo/html/index.en.html 96https://ec.europa.eu/eurostat/statistics-explained/index.php/Inflation_in_the_euro_area
this cannot happen if banks are legally prohibited from charging debit interest. Therefore, a ban will hinder the achievement of the main goal of ECB’s monetary policy.
-An indirect effect of a ban on negative interest is that it makes it more expensive for
companies and individuals to borrow money. Because banks make less profit on their deposits (and will perhaps even make losses on it), they will try to compensate this by raising their interest rates on lending.97 I will further discuss this effect in next paragraph. Since borrowing becomes more expensive, companies (and individuals) will be less likely to invest or spend money. Because banks cannot transmit negative interest to private accounts and interest rates on outstanding bank loans may rise, it is plausible that further cuts of ECB’s key interest rates will not be as effective.98 This means that a ban on negative interest might raise the effective lower bound.99 If this is the case, it will be more difficult for banks to stabilize inflation at its objective, as it cannot lower its policy rate further in response to adverse shocks. One of ECB’s main monetary policy tools is undermined. It is very unlikely that this can be, sufficiently (and with similar effect on consumers), compensated by other tools of ECB’s monetary policy, because their effect on price levels are weaker.100 Additionally, increasing the use of other monetary tools would have undesirable effects that go beyond the scope of my thesis.
It has to be acknowledged that the effective lower bound will only be raised (EU-wide) in the hypothetical scenario that almost all EU countries ban negative interest rates on private accounts.101 If only a couple countries with medium-sized economies have such a ban (as is currently the case) the detrimental effects on the average price stability of the Eurozone are not as severe because they will (mostly) be limited to those countries. The ECB finds
different inflation rates in euro zone countries not necessarily problematic.102 Nevertheless, a
97 Brits (n 73) p.16.
98 Key ECB interest rates directly affect money market interest rates. Because the ECB’s deposit rate is -0.5%
(and bank pay 0,5% interest for overnight deposits at the ECB), the lower limit of short-term market rate is close to -0,5%. Because of the marginal lending rate (overnight) and main refinancing operations rates are 0 and 0,25% respectively, the upper limit of short-term market rates is close to 0%. Because of the low deposit rate, the interest rate at which banks lend to each other in the short term is close to -0.5%. The effects of ECB interest rates on consumer borrowing and lending interest rates are indirect. To calculate the interest rates on bank lending, multiple (external) elements have to be taken into account most notably risk premia and bank profit. See
https://www.ecb.europa.eu/mopo/intro/transmission/html/index.en.html
99 Markus K Brunnermeier & Yann Koby ‘The “Reversal Interest Rate”: An Effective Lower Bound on
Monetary Policy’ [2017] Mimeo, version 10 July 2017, p.1.
100Leonardo Gambacorta, Boris Hofman & Gert Peersman ‘The Effectiveness of Unconventional Monetary
Policy at the Zero Lower Bound: A Cross‐Country Analysis’ [2014]. Journal of Money, Credit and Banking Vol. 46, No. 4 (June 2014), pp. 615-642, p.627.
101 If the transmission of monetary policy to private consumers still works in most countries, lowering interest
rates still has an effect EU-wide.
102 ECB, ‘Why are stable prices important?’ 8 May 2017,
key consideration in all ECB measures is the transmission of its monetary policy in all jurisdictions of the euro area.103 On 18 march 2020 the ECB stated that “The ECB will not
tolerate any risks to the smooth transmission of its monetary policy in all jurisdictions of the euro area”.104 Minimum interest rates are a barrier to the smooth transmission of monetary
policy in some jurisdictions. The ECB, clearly, does not tolerate this. Furthermore,
considering the large discrepancy between the current and the desired rate of inflation in the Eurozone, it is undesirable that transmission of monetary policy is undermined for some countries, even though the effects on price stability in the Eurozone as a whole are not enormous.105 If countries with a more sizable economy (e.g. Germany) would implement a ban on negative interest, the situation would become even more problematic, since the effect on the inflation of the Euro will become significant.
Because minimum interest rates, which hinder banks to transmit negative interest to their customers, undermine ESCB policy, a ban on minimum interest rates may be justified. In the fourth chapter I will examine the legal possibilities for the ECB (and the EU) to do this.
3.2.3 Profitability of banks
To find out how, and to what extent, a ban on negative interest worsens the profitability of banks, I will break down the way banks make profit. Banks make most of their profit (for Dutch banks it is around 80 percent) on their interest margins.106 The (net) interest margin consists of the margin on deposits (in Dutch: inleenmarge), the margin on lending and value created by maturity transformation.107
The margin on deposits is calculated by subtracting the market interest rate from interest rate on deposits.108 In normal conditions, market interest rates are lower than interest rates banks pay on their deposits. This would make deposits profitable for banks, because deposit funding is cheaper than market funding. However, because market interest rates are below zero, this is
103 In decisions regarding OMT, PSPP and PEPP. See note 104 for an example.
104 Press release ECB ‘ECB announces €750 billion Pandemic Emergency Purchase Programme (PEPP)’ 18
March 2020, https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200318_1~3949d6f266.en.html
105 The Eurozone inflation rate was 1,4% in 2019 and is forecasted to be 0,3% in 2020. This is well below the
desired rate of just under 2%. See ECB’s inflation forecast: https://ec.europa.eu/eurostat/statistics-explained/index.php/Inflation_in_the_euro_area
106 Brits (n.73) p.15. 107 Ibid p.16.
108 Normally, an interest rate swap will be used to hedge the market interest to a fixed rate. See for example Brits
no longer the case. For example: the 1-month Euribor rate is lower than zero since March 2015, and has even fallen below -0.5% in 2020.109 Because most financial institutions have hedged their (relatively short-term) exposure to market interest with derivatives (e.g. interest rate swaps), many banks do not have a negative margin on their deposits yet.110 However, if market interest rates remain that low, negative margins will be common in the future. At unchanged market rates the average deposit margin of Dutch banks will be below zero in 2022.111
If this is the case, the only way banks can keep their margin on deposits above zero is by charging debit interest. This debit charge also has to be substantial because it has to be higher than the market interest rate. If banks are not allowed to charge negative interest on private deposits (which amounts to around 80% of total deposits), this cannot happen. A ban on negative interest rates (on private deposits) forces banks to maintain negative deposit margins. If banks cannot charge interest on the majority of their deposits banks cannot make profit on deposits, until the market rate goes up.112
The lending margin (the interest rate on banks outstanding loans minus the market interest rate) is not necessarily affected by a ban. Banks will try to increase their lending margin to compensate for the negative interest margin. They can try to raise the interest on mortgages and corporate loans. Raising interest rates on loans will be difficult because they have
competition from pension funds and insurance companies.113 Whether banks are able to raise their interest rates on loans also differs from country to country, because the competition in the loan market varies.114 It might also have something to do with the fact that current lending rates vary quite significantly. The average bank lending rate is 1,64% in Austria, 1,58% in Belgium, 1,83% in Germany and 0,47% in The Netherlands.115116
Furthermore, A ban does not affect the ability of banks to make money on maturity
transformation (i.e. borrowing on a shorter time frame than lending money out). However, because differences of short-term and long-term interest rates have become smaller, banks
109 See https://www.euriborrates.eu/en/currenteuriborrates/1/euriborrate1month/ (1 July the Euribor rate is
-0,512%.
110 Brits (n.73), p.17. 111 Ibid p. 17.
112 They will even make losses. 113 Brits (n.73), p 17.
114 Stjin Claessens, Nicholas Coleman, and Michael Donnelly “Low-For-Long” Interest Rates and Banks’
Interest Margins and Profitability: Cross-Country Evidence’ [2017].International Finance Discussion Papers 1197, p.8.
115 See the bank lending rates in https://tradingeconomics.com/
116 The relatively low average lending rate in The Netherlands is likely due to the relatively high amount of
make less profit on this. For that reason, it is not desirable to worsen the profit-making ability of banks even further.
Lastly, it should be acknowledged that banks can try to compensate a part of the decreased profitability by charging higher bank fees. Because bank fees are, generally, indifferent on the amount of money on the bank account, there will bre undesired effects: It will mainly scare smaller savers away, as opposed to larger savers.117
It is undesirable that banks become less profitable for many reasons. Some banks may find it more difficult to meet their obligations and lose access to capital markets, which may hinder lending and put pressure on confidence in banks.118
3.3 Conclusions
In this chapter I have found that a ban on negative interest (or a minimum interest rate) has mainly negative consequences and, as time goes by, these effects become more severe. It worsens the profitability of banks if market interest rates remain below zero. The margin on deposits cannot exceed zero because the banks cannot charge negative interest on the majority of their deposits. Furthermore, a ban would hinder the ECB from achieving its monetary objectives and would undermine a bank’s freedom of contract.
117 Relatively speaking, the smaller saver would pay more for the bank account. The larger savers will be
relatively unaffected even though they cause losses on deposits more. This contradicts the dominant view that relatively small savers should be protected from bank charges.
Chapter 4: Can the ban be banned?
In paragraph 3.2.2 I have shown how national minimum interest rates undermine ECB policy. In this chapter I will examine whether, and how, the ECB (or the EU) could potentially disable (or ban outright) the (distorting) nationally imposed minimum interest rates in Eurozone countries.119 I will investigate this by studying the legal bases in the treaty. First, I will examine the exclusive monetary competence of the ECB and briefly discuss the purpose of monetary policy.
Secondly, I will explore the legal instrument the ECB and the EU are granted in the treaty that can, possibly, ban minimum interest rates.
4.1 Legal framework ECB’s exclusive competence
In The treaty of the European Union (hereafter TEU), signed on 7 February 1992, it was agreed that the Euro would be introduced before 1 January 1999. The creation of a single currency and the European Central Bank would be the third and final stage of the
establishment of an Economic and Monetary Union. Article 3 (4) TEU states: “The Union
shall establish an economic and monetary union whose currency is the euro.” Furthermore, in
accordance with article 119 (2) TFEU member states “shall include a single currency, the
euro, and the definition and conduct of a single monetary policy and exchange-rate policy the primary objective of both of which shall be to maintain price stability”
Hence, the plan was that Member States would adopt a single currency that would be
governed by one monetary policy, with maintaining price stability as primary objective. In the Maastricht Treaty, two Member States (The UK and Denmark) opted out of the transition to the third stage of the Economic and Monetary Union. Consequently, not all Member States have adopted one single monetary policy.
Nevertheless, the countries that have adopted the euro (19 out of 27) do have one single monetary policy. In accordance with Article 3(1)(c) TFEU the European Union shall have exclusive competence in the area of monetary policy for the member states whose currency is the Euro. Articles 282 (1) TFEU states that this will be conducted by the European System of Central Banks (i.e. the European central bank and the central banks of member states whose
119 Note that a ban on national minimum interest rates is completely different from a ban on negative interest
rates. A ban on national minimum interest rates in Eurozone countries will, most likely, be achieved by harmonizing law in the Eurozone countries.
currency is the euro). The ECSB shall be governed by (the decision-making bodies of) the ECB, in accordance with Article 129 (1) TFEU.
We can conclude that in all the Euro countries the EU has exclusive competence in the area of monetary policy and the ECB is responsible for defining and implementing this policy. The TFEU does not define monetary policy. The treaty refers to the objectives rather than to the instruments of monetary policy.120 To find out whether measures fall within the definition of monetary policy (for the purposes of Articles 3(1)(c) and 127 TFEU) it is necessary to examine the objectives attained by them.121
Nationally imposed bans on negative interest rates do not have the objective to maintain price stability. They are imposed by national legislation (and court rulings) and mostly have the objective to protect consumers. The fact that those bans have indirect effects on the stability of the euro is not a sufficient basis to argue that they violate EU’s exclusive monetary competence.122
However, because minimum interest rates hinder the transmission of monetary policy (across all jurisdictions), thereby making ECB tools less effective and hindering the ECB from achieving its primary objective of monetary policy (Article 127 (1) TFEU), it can be argued that minimum interest rates undermine the ECB in an area in which it is exclusively
competent.
4.2 Legal instruments
At the beginning of my research I had found three articles in the treaty on the functioning of the European Union on which a ban might, potentially, be founded: Articles 132, 133 and 352.
I will explore this possibility by studying the wordings of the articles, the case law and the literature.
4.2.1 Article 132:
1. In order to carry out the tasks entrusted to the ESCB, the European Central Bank shall, in accordance with the provisions of the Treaties and under the conditions laid down in the Statute of the ESCB and of the ECB:
120 Case C-370/12, Pringle v Ireland and Others, European Court of Justice, Judgement of 27 November 2012,
p.53.
121 CJEU Pringle, p.55. 122 See also CJEU Pringle p.56.
