Bank of Slovenia analysis: no expectation of general introduction of custody fees for households
In the environment of non-conventional monetary policy measures, which includes the negative interest rate policy, certain banks introduced negative interest rates or custody fees for corporates some time ago. Several banks in the rest of the world have recently decided to introduce negative interest rates for households. The Bank of Slovenia has therefore drawn up analysis of the impact of the potential introduction of custody fees for household deposits at Slovenian banks. According to a survey of banks, we find that there is no expectation of the general introduction of custody fees for households in the current situation. In the event of such a measure being introduced by commercial banks on deposits over EUR 100,000, which is most often cited as the threshold for negative remuneration, we would not expect a major outflow of deposits, but instead a restructuring. Here it is significant that in Slovenia only 1% of customers hold sight deposits of more than EUR 100,000.
The Bank of Slovenia has drawn up analysis of negative interest rates on household deposits or custody fees. It should be emphasised that the potential introduction of custody fees is a business decision for the commercial bank in question.
Banks in the euro area initially introduced negative interest rates or custody fees for corporate deposits alone, while last year saw several banks decide to introduce them for household deposits. Negative interest rates on household deposits have been introduced or are on the point of being introduced by certain banks in Germany, Italy, Luxembourg and the Netherlands. Alongside countries in the single currency, they have also appeared in Denmark and Switzerland. Outside the euro area, the central bank interest rate is also negative in Switzerland, Denmark, Sweden and Hungary. According to the latest public data, around 5% of the total stock of deposits and 20% of the total stock of corporate deposits in the euro area was remunerated at negative interest rates last year. In Slovenia 4.8% of the total stock of corporate deposits carried negative interest rates in October.
Bank of Slovenia survey
A Bank of Slovenia survey of commercial banks revealed that the introduction of negative interest rates or custody fees for households is not being planned, but that the potential for introduction primarily depends on how long the low interest rate environment lasts, and how competitor banks respond. In the event of the introduction of custody fees, only six of the 15 banks anticipate the outflow of a small proportion of their deposits, while only one bank assesses that a larger proportion of its deposits would be withdrawn.
Potential impact on households
Banks in the rest of the world that have opted for custody fees for household deposits in most cases limited them to large-value deposits, i.e. above EUR 100,000 or even above EUR 1 million. Because in Slovenia only a small percentage of customers (1%) hold sight deposits of more than EUR 100,000, the potential introduction of custody fees on sight deposits would increase the cost of holding cash for a small number of customers only. The Bank of Slovenia’s assessment is that in the event of the introduction of custody fees, some of the customers would be willing to accept the custody fees, but most likely it would primarily be the structure of deposits that would change.
Slovenian households are typically conservative and risk-averse: currency and deposits are their preferred form of saving (48% of the total). There has been no significant change in the structure of Slovenian households’ financial assets over the last decade. Individuals who decide to switch deposits into other forms of saving would therefore mostly generate demand for a small set of alternative financial assets, whose attributes would have to be relatively similar to deposits from the perspective of liquidity and a low risk profile (e.g. government bonds, treasury bills, certain forms of pension saving).
Potential impact on banks
The robustness of the banks to the potential effects of a fall in interest rates and the reallocation of deposits is currently good. This is attributable to two factors: (1) a high proportion of liquid assets on the asset side of the balance sheet, and (2) relatively good access to international financial markets compared with the previous crisis period. In the event of an outflow of deposits, the important factors for banks are the stock of liquid assets that the bank holds to cover the outflow, and the alternative sources of funding that the bank can use instead of deposits.
The Bank of Slovenia thus advises commercial banks to assess their liquidity needs if they are considering the introduction of negative interest rates on deposits.
Bank of Slovenia staff analysis Custody fees and negative interest rates for household deposits