The topsy-turvy world of negative interest rates reverses the usual time preference logic of paying people a return for forgoing consumption and saving for the long term. Official negative rates are squeezing banks' margins and encouraging clients to look at other, possibly riskier, alternatives.

Holders of Swiss bank accounts face a potentially nasty dilemma: put money into certain products paying a low return or face having to cough up a fee for holding safer cash deposits. Such is the world of negative interest rates.

A figure in the Swiss private banking industry told this news service that bank literature he received said he could consider certain savings and investment products or else be hit with the -0.75 per cent rate involved in staying with cash. For those who want the cash for liquidity purposes, and fear taking on risk, that’s an uncomfortable place to be. 

There is a risk that some clients might take action they will regret later, the person, who asked not to be named, told WealthBriefing.

Swiss regulator FINMA has not accused banks of mis-selling or improperly pressurising clients about cash alternatives. The watchdog said it doesn’t guide banks about their specific advice, although suitability is an important test of how it supervises banks. 

Switzerland, along with Denmark and Japan, has had negative official interest rates for several years, with no obvious end in sight. In some other countries, interest rates are so low that when inflation is factored in, real rates are zero or negative. This form of “financial repression” is part of the way in which central banks have tried to boost debt-laden economies after the 2008 financial smash. The policy explains in part why investors have poured into areas such as private equity and credit, seeking less liquid assets in return for any kind of yield. The disruption of COVID-19 means a return to more normal pricing of capital is as far off as ever.

Charges for cash
A number of prominent banks in the Alpine state have introduced charges for large cash deposits.  

Last October, Credit Suisse started charging clients with cash balances above SFr2.0 million ($2.02 million) a rate of 75 basis points, expanding on a policy it had introduced for holders of euro accounts. The bank introduced a -0.4 per cent rate for the first time on 1 September for its clients with a balance of €1.0 million; it had not previously had a negative rate for private clients with euro accounts.

UBS said that from 1 November 2019, private individuals holding large cash balances of SFr2.0 million with UBS Switzerland would be charged a deposit fee of 75 basis points. For clients holding large euro cash balances with UBS Switzerland AG, the threshold was cut to €500,000 as of November, from €1 million, which it said was “in line with competitors”. Holdings above the threshold are charged a deposit fee of 0.60 per cent per annum. Although UBS did not comment to this news service about the latest expression of concern, it is understood that suitability of any offerings has to be taken into account when talking to clients about their options. 

Julius Baer said last year that negative interest rates for clients would be “introduced on a case-by-case basis for certain currencies” (Swiss franc, euro, Danish Krone and Swedish krona). Clients with large cash holdings are affected. Asked by WealthBriefing to elaborate on the issues around negative rates, the Zurich-listed firm said: “At Julius Baer, negative interest rates are introduced on a case-by-case basis for certain currencies (e.g. CHF, euro). Our relationship managers are in regular contact with clients holding large cash positions, in order to discuss suitable investment proposals appropriate to their investment and risk profile as alternatives.”

Vontobel, responding to queries, said that it did not “do product push”, adding: “Cash alternative solutions are shown and explained to clients but they are always made aware that such solutions are not a cash substitute. Our philosophy is to carefully listen to our clients, understand them and think and reflect based on that information. We then show possible solutions that are discussed together and implemented based on the client’s requirements.”

Credit Suisse told this news service: “In line with the approach that has long been followed by other banks, Credit Suisse also introduced negative interest rates for clients with very large CHF cash holdings. The reason for this is the persistent negative interest rate environment.”

“We have discussed alternative investment opportunities with many clients and continue to do so. Alternative investments are discussed with clients based on their individual situation, needs and risk profile. Depending on the individual risk profile of the client, there are various alternative investment options,” a spokesperson said. 

The Swiss Bankers Association has said that the negative interest rate policy is no longer needed. It hurts savers and fuels asset bubbles. While written in the typically restrained language of such missives, a report from the SBA a year ago looking into central bank policy made it clear that the negative rate is causing considerable pain and concern. 

Negative rates have arguably prompted more consolidation in the Alpine state's sector. Swiss capital adequacy buffers are typically higher than in most countries, which has intensified the pain. The pressure on margins also adds to the loss to the country's former international attraction - its secrecy laws.