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The Wrath of Draghi: Bailed-Out German Megabank Imposes “Negative Interest Rates”

Commerzbank, Germany’s second-largest bank, a toppling marvel of ingenuity during the Financial Crisis that was bailed out by ever dutiful if unenthusiastic taxpayers, will now reward these very folks with what Germans have come to look forward to: the Wrath of Draghi.

It started with Deutsche Skatbank, a division of VR-Bank Altenburger Land. The small bank was the trial balloon in imposing the Wrath of Draghi on savers and businesses. Effective November 1, those with over €500,000 on deposit earn a “negative interest rate” of 0.25%. In less euphemistic terms, they get to pay 0.25% per year on those deposits for the privilege of giving their money to the bank.

“Punishment interest” is what Germans call this with Teutonic precision.

The ECB came up with it. In June, it started charging a “negative interest rate” of 0.1% on reserves. In September, it doubled that rate to 0.2%.

“There will be no direct impact on your savings,” the ECB announced at the time. “Only banks that deposit money in certain accounts at the ECB have to pay.” It even asked rhetorically: “But why punish savers and reward borrowers?” And it added helpfully: “This behavior is not specific to the ECB; it applies to all central banks” [here’s part one of the saga… The Wrath of Draghi: First German Bank Hits Savers with ‘Negative Interest Rates’].

On November 6, as rumors were swirling that even the largest banks would inflict punishment interest on their customers, Commerzbank CFO Stephan Engels came out swinging in an interview to assuage these fears. He said point blank, “We cannot imagine negative interest rates on deposits of our individual and business customers.”

On November 11, it was Martin Zielke, member of the Commerzbank’s Board of Managing Directors, who recited the same corporate script in his interview with Focus: “We cannot imagine at the moment that private customers pay a negative interest rate on their deposits with us.”

At the moment? So, “you cannot definitely exclude a negative interest rate?” he was asked.

“I cannot imagine it,” he said.

Eight days later, Commerzbank confirmed that it too would inflict punishment interest on “some large corporate customers with high balances as well as on large corporations and institutional investors.” It used the term “deposit charge” instead of “punishment interest.” December would be the propitious month. And thus, the first large bank in the Eurozone is starting to inflict the Wrath of Draghi on its customers.

At this point, Commerzbank doesn’t have a flat punishment rate. It wants to negotiate the rate with each affected customer individually, it said. But private individuals, business customers, and medium-sized corporate customers would “categorically” not be affected, the bank said. Or at least, it cannot imagine it.

Deutsche Bank, Germany’s largest and most scandal-infested bank, is also moving in that direction, according to an unnamed source of the Wall Street Journal Deutschland. However, a spokesman non-denied this, saying carefully that the bank “at this time” was not planning “to introduce deposit fees in the general banking business.”

At this time….

Some US banks, including Bank of New York Mellon, Goldman Sachs, JP Morgan Chase, along with the Swiss bank Credit Suisse and British bank HSBC have also told some clients that punishment interest – they probably didn’t use that term – was going to hit their euro deposits.

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1 Comment

  1. Lee_Adler

    The flaw in this stupid policy, as I have been pointing out since the ECB started it in June (http://youtu.be/9CNjLl3_0SU) is this. 

    Spending the money does not solve the problem unless the recipient is outside the Eurozone. Otherwise the money stays in an EZ bank, in the account of another depositor subject to the negative deposit rate. Eventually one of the bagholders says enough, and instead of leaving the cash on deposit, either withdraws it in the form of cash, or uses it to pay off a loan.  Poof goodbye money! So the ECB’s balance sheet has continued to shrink since the negative deposit rate was instituted. The new direct purchase programs have only been able to level that trend, not reverse it. 

    The negative deposit rate incentivizes either the extinguishment of the deposit by paying down a loan, or the withdrawal of cash to hold in a mattress, or the shifting of deposits to banks outside the EZ, something that multinational corporations will quickly due. 

    The more widespread this charge becomes, the more the ECBs original negative deposit rate policy will backfire.  Just another example of central bank insanity.

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