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It may be hard to believe for those who took advantage of it, but it has been 20 years since possibly Ireland’s most famous and controversial savings plan was launched.
In an attempt to encourage people to get some money – and some warmth – out of an economy that was beginning to flourish, then-Finance Minister Charlie McCreevy introduced the Special Savings Incentive Account.
The SSIA was a simple idea with a very attractive perspective. For every € 4 that the saver deposited in a special account that had not been touched for several years, the state added € 1.
It was incredibly popular but criticized by some who said it helped fuel the property boom, as well as a broader overheating of the economy as the bills matured.
A financial crisis, a later recovery, and a pandemic later, governments and regulators have the exact opposite problem and are now trying to encourage people to spend, not save.
Irish consumers, once bitten, twice shy about a brutal recession, have been collectively paying off their debts and saving money with considerable enthusiasm.
And the pandemic overloaded this latest practice.
According to the most recent figures from the Central Bank, together we deposited 950 million euros in December alone, bringing deposits to an all-time high of 125,000 million euros, representing a savings growth of around 13% last year .
Rocky bottom rates
For several years now, central banks have tried to encourage people to spend their hard-earned money, and even borrow.
One instrument they use to do that is interest rates.
By reducing rates to zero at the European Central Bank level, euro zone banks can theoretically access very cheap money and distribute loans to businesses and consumers at low rates.
At the other end of the scale, it makes saving money less attractive because banks offer negligible returns on deposits.
The ECB was so determined to get money flowing into the euro zone economy that it introduced negative interest rates on deposits, for the first time almost seven years ago.
How can they offer an interest rate below zero?
The practice of imposing negative interest rates has become common in recent years.
Negative rates are now frequently charged on public debt, which effectively means that an investor buying a government bond pays interest on it, which sounds counterintuitive when they are supposed to make government money from it.
Similarly, at least one Danish bank has applied negative rates to mortgages, which means that the mortgage holder actually gets a small return from the bank each month when repaying the loan.
When it comes to deposits, the ECB has been charging banks for depositing excess money (above what they must keep in reserve) in the ECB’s overnight deposit facility, going from a rate of -0 , 1% in 2014 to -0.5%. now.
In other words, the bank is having a hard time maintaining our savings and deposits.
“Every additional € 1 billion deposited with the ECB above the minimum requirements equates to a charge of € 5 million,” notes Davy Diarmaid banking analyst Sheridan.
That’s a significant hit to income at a time when interest rates are also falling and consumers are generally reluctant to borrow.
So why don’t they charge us for deposits?
Until now, they have refrained from doing so, with the exception of large institutional and corporate depositors.
Credit unions, for example, are charged for depositing their own clients’ deposits with banks, which explains why many have begun to put limits on individual member deposits.
Bank of Ireland wrote to pension fund investors last summer informing them of its intention to charge negative interest rates for having cash.
The bank’s executive director, Francesca McDonagh, also indicated that the bank would begin to impose negative rates on SMEs (small and medium-sized companies) with deposits greater than 2.5 million euros.
AIB charges negative rates on companies that have more than 3 million euros in their accounts, while it has reduced the rates on most personal accounts to zero.
The bank previously indicated that it would seek to impose negative rates on high net worth individuals with balances of more than 1 million euros.
Ulster Bank also charges negative interest rates on savings of more than € 1 million held by commercial clients and institutional clients.
Are the regular savers next?
Negative rates for retail customers are here.
German digital bank N26 became the first bank to move in that direction confirming last October that it would charge negative rates on deposits above € 50,000 (with the rate being charged only on top of € 50,000).
The Sunday Times reported in recent weeks that some of the major pillar banks were seeking to expand the deposit base that would be subject to interest rates.
Clients with large account balances would be the target initially as the newspaper said would likely be led by AIB.
In a research note, Davy’s Diarmaid Sheridan said the double challenge for banks of significant increases in deposits and negative interest rates is unlikely to change for years.
“The introduction of negative rates on retail deposits is inevitable to offset some of these headwinds,” he said.
Is this going to happen soon?
A bank informant said that the gradual introduction of negative rates on retail deposits would likely come sooner rather than later, but that they would be introduced gradually and with a very high level of savings initially, perhaps 500,000 euros, and gradually reduced thereafter with time.
He said the first moves could possibly be announced in the coming weeks when banks release their full annual results and Ulster Bank is expected to announce its future plans for the Irish market.
“If Ulster Bank were to go out, a large part of the deposits would need a new house and no bank, except perhaps KBC, wants to receive that.”
“Banks are likely to want to make the new policies clear and get them out there before that money can start migrating and finding a new home rather than creating a scandal in six months,” he said.
KBC, for its part, has said that it has no intention of introducing negative rates at this time.
Speaking to RTÉ on releasing its full annual results this week, the bank’s chief executive in Ireland said it was in the unique position in the market here to be able to obtain beneficial financing rates from its Belgian parent, which it described as’ enormously excess fluid.
“I don’t see any need today to start looking at negative rates for retail deposits, far from it,” said Peter Roebben.
How much would negative rates cost me?
Assuming the major banks start to impose negative rates on deposits, it depends on what rate they apply and what level of savings.
Starting at € 1 million would affect a small but significant cohort of savers.
According to Central Bank figures from the middle of the last decade, about 1,800 households had deposits of more than 1 million euros. That number has likely increased since then.
If we take the threshold of € 500,000 and assume that banks apply the full rate of -0.5% to the total amount of savings, that would be equivalent to a charge of € 2,500 per year.
We have € 100,000 saved for a deposit on a house. If they gradually lower the threshold, how much will it cost us?
A few years ago, you could have realistically expected to get a return of 1.5% per year on that deposit.
That would be equivalent to € 1,500 of interest, on which a DIRT (Deposit Interest Withholding Tax) of 33% would be applied.
That would have left you with a net return of € 1,000, a nice boost to your savings.
If we assume that the bank finally introduces negative rates on amounts greater than € 50,000, as in the case of N26, and transfers the ECB rate of -0.5% total, in this new scenario, those same € 100,000 would erode € 250 per year for granted in your deposit account, or for approximately € 20 per month.
It’s not a massive loss in the context of the size of savings, but it would be an alarming new change for a habit we are so used to being rewarded for.
Added to that, if inflation recovers, the real value of your savings could erode further.
Are there alternatives to deposit accounts?
As part of this process, banks are expected to introduce some low-risk investment products that will allow them to steer people with large deposits towards some alternatives and hopefully discourage people from hoarding cash at home.
From a banking perspective, that largely solves the problem.
Deposits would become an asset with some fee income attached instead of a liability for costs and banks would not be pressuring valuable customers who can bring in unwanted negative rate deposits.
“This is the long-term solution. They will be invested in short-term government bonds or highly rated investment grade companies in the short term,” explained a banker.
“They would be very low risk, but they will not be zero risk.”
But large deposits are no longer risk-free with rules on ‘bailouts’, which means that deposits of more than € 100,000 can be affected in case a bank runs into difficulties.
Negative interest rates are approaching, but it may take a while before most of us feel the pressure.
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