End of negative interest rates: First private individuals, then institutional investors profit

Kleinmachnow, 22 February 2022 – The signs are pointing to an interest rate hike, but this will take some time to reach institutional investors. “It is to be expected that the banks will move first with private savers, because this is where the public pressure is greatest,” says EDS founder and CEO Sebastian Bergmann. “Only after that will any interest rate increases also be passed on to institutional investors.”

Inflation rates are rising, central banks are reacting. Interest rate hikes have been announced by both the Fed and the ECB – and could end the long phase of negative interest rates. Since 2014, banks have had to pay this if they park money at the ECB, and since 2019 this penalty rate has been -0.5 per cent. “And it was the institutional investors where the banks first passed on these costs,” says Bergmann. This is how the negative interest rate slowly moved into the market: first it only applied to large amounts of ten million or more, then it was five, later one million, and in 2019 the first banks charged money from the first euro.

This meant that the negative interest rate had arrived in the broad market – five years after the institutions, private individuals also had to pay. The path out of negative interest rates could be a mirror image. “It can be assumed that negative interest rates will first be phased out for small credit balances,” says Bergmann. “Only then would progressively larger credit balances also benefit.” An interest rate step from -0.50 to -0.25 per cent would probably not go down well at all with most institutional investors.

“It took the banks almost two years before they were able to pass on the ECB’s negative interest rates in full to their customers,” says Bergmann. “The systems of most banks did not provide for negative interest rates at all.” It is not to be expected that the banks will react quickly now. On the other hand, the public pressure on small savers is much greater and has made some banks hesitate for a long time whether to pass on negative interest rates.

“To be honest, many banks have avoided this by introducing new fees or adjusting their prices,” says Bergmann. “The effect is the same, but the fees continue even if negative interest rates should be history at some point.” Especially since there are now rulings declaring negative interest rates for private individuals to be inadmissible. Consumer protection groups had filed lawsuits in this case and in at least one case they were proven right.

Of course, large institutional investors can also exert pressure by allocating money differently. “But many of them have such strict investment guidelines that this is hardly an option,” says Bergmann. In this respect, it can be assumed that there will only be real relief for institutional investors when central bank interest rates are actually above zero. “Until then, the banks will banks will try to earn as much as possible from the improving interest margin.”