Cyprus Mail
Our View

Our View: Uncharted waters for banks in age of negative interest rates

Central Bank Governor Constantinos Herodotou

On the first working day of March, companies will be charged for keeping their cash in the bank, as we enter an era of negative interest rates. This has been a long time coming: the ECB has been charging a negative interest rate for overnight deposits since June 2014 and increased this to -0.50 per cent last September. It means that a bank has a cost for the reserves it has at the ECB and inevitably wants to pass the cost on to its depositors as it cannot lose money for accepting deposits.

Businesses appear to have accepted this reality and will obviously try to minimise losses for being cash-rich by investing part of their liquidity. Even a 2 per cent return on their investments in theory is preferable, although there is some risk involved. Having a full-time portfolio manager to monitor company investments daily is probably the way forward for cash-rich businesses that want to minimise the cost of healthy liquidity.

Individuals, however, are much less likely to accept a negative interest rate on bank deposits. Many would rather keep their money in a hiding place at home rather than pay the bank to keep their money safe, something they have never known and will see as yet another arbitrary act by the banks. When, a few months ago, the Bank of Cyprus announced it was increasing its charges from the start of this year the politicians stepped in and forced it to put its plan on hold.

It appears the plan is not on hold indefinitely. Last Friday Finance Minister Constantinos Petrides met the governor of the central bank Constaninos Herodotou to discuss research being carried out by the latter on charges imposed by banks in the EU. This will also be a topic of discussion at the House next week. The governor’s findings will determine whether the finance minister will step in and issue a decree regulating bank charges.

Higher bank charges are a direct consequence of the negative interest rates, which are eating away at bank profitability. The irony is that the banks have large amounts of cash they could lend – and they would not be charging negative interest – but lending criteria are now much stricter so that we do not experience another NPL fiasco that has still not been overcome. Cutting costs is another way of increasing profitability, but this means poorer customer service and higher charges as a way of forcing customers to use e-banking. So how will banks stay profitable without alienating customers and forcing the intervention of the authorities?

We are in uncharted waters and nobody can safely predict what the direction will be in the next few months.

 

 

 



Related posts

Coronavirus: Minister said people must drastically limit contact with others

Jean Christou

Coronavirus: One new death, 35 new cases, risk ‘extremely high’ virologist says (Updated)

Jean Christou

Economic life’s quest to continue under coronavirus cloud

CM Guest Columnist

Do you really think our children are safer in the UK?

CM Reader's View

Coronavirus: two more cases in the north, 64 in total

Jonathan Shkurko

Coronavirus: Two BoC branches closed after confirmed cases diagnosed

Staff Reporter