The Wrath of Draghi: Biggest German Banks Impose “Negative Interest Rates”

“Punishment Interest”

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.

The writing has been on the wall. On November 5, another banker gave an interview, the most revealing yet. Asoka Wöhrmann, Chief Investment Officer at Deutsche Bank’s asset management division, told the Welt that people “should finally stop saving more and more, and think about spending the money.”

The Draghi solution: flog savers until their mood improves.

He explained how German savers were getting screwed by interest rates that had been pushed below inflation. So, instead of trying to save for retirement or illness or periods of joblessness, they should just blow the money now.

But wait, even if inflation eats that money ever so slowly, “at least the number in their savings account doesn’t get smaller, and that’s enough for many people,” the Welt pointed out.

“That’s about to change,” Wöhrmann said, and you could almost see him grin.

Banks would sooner or later pass the ECB’s “punishment interest” – he actually used that term – on to their customers. So far, only business customers are getting hit, he said. “But soon, it will hit individual customers.”

And it would good for them: it “should trigger the aha-effect,” he said. “It will hopefully become clear that it’s not worth it to leave your money lying around at the bank. When every individual spends money, it helps all.”

And with the money they can’t spend despite their efforts, they should take “greater risks” and invest it “primarily in stocks….”

Just when the DAX, which has been soaring for years despite a so-so economy, pierced the 10,000-mark for the first time last summer. After having missed the phenomenal 160% run-up since February 2009, and after having missed the peak in July, German savers are now suddenly told by none other than the most scandal-infested bank in Germany, if not the world, to plow their dear savings into stocks.

To stop stocks from sliding further? Turns out, since that peak in July, they’d tumbled over 14% by mid-October and are still down 6%. But if all savers follow Wöhrmann’s ingenious and well-meaning advice, they could perhaps drive stocks to new highs so that the smart money can get out at the top.

This is the new strategy of the ECB: to use the banks under its umbrella to confiscate in bits and pieces – now that inflation is too low to accomplish this mission with adequate speed – the wealth and liquidity that prudent people and businesses have painstakingly accumulated. Their only escape: the fangs of risky assets in an environment where nearly all assets are overpriced.

Punishment interest started with tiny Skatbank. Now it’s spreading to the largest banks in Germany. Soon all banks will do it, and customers can’t choose one bank over another to escape it; the ECB doesn’t want competition on this issue. Soon the trigger levels will come down, until everyone gets hit. And if Draghi has his way, the ECB, seeing how successful money confiscation really is, will raise the punishment interest rate further. After all, as the ECB and Deutsche Bank pointed out, mauling savers and businesses is in some magic way good for them. They should just enjoy it.

And the risks? There’s some new thinking about the markets in this crummy global economy where nearly all assets are overvalued. Read…  It’s Official: Party Now, Apocalypse Later

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  13 comments for “The Wrath of Draghi: Biggest German Banks Impose “Negative Interest Rates”

  1. KIm Eakin says:

    The best way to respond to this theft by the financial industry is to turn the tables on them and instead of buying paper assets, buy precious metals and store them in your own safe. This will not only protect your savings, it will give the bankers a screaming fit. That’s a win-win in my book.

    • AC says:

      Just before interest rates rise, driving a gold price drop?

      I suppose you could buy low rate bonds, before rates rise, but it’s probably a bad idea, too.

  2. Michael Gorback says:

    What if the German people decide not to buy stocks, bonds or consumer goods but gold, silver and bitcoin?

    • Generalfeldmarschall von Hindenburg says:

      The German common people seem to think Merkel is wonderful but she’s clearly just there to work for DC and Wall Street. One can only wonder how long it will be before enough pain is inflicted in the home country before people start rebelling. I wouldn’t guess it will happen anytime soon however. Like Americans, Germans love tough talking conservative politicians who never deliver on any of their promises.

    • Wolf Richter says:

      That would really drive Draghi nuts. He’d have to quit in shame and go back to Goldman or become prime minister of Italy.

  3. The flaw in this stupid policy, as I have been pointing out since the ECB started it in June 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.

    • whydtinogo says:

      Well said – just goes to show that central bankers don’t truly understand how the monetary/banking system actually works. Just wondering how the ECB expects banks to “fund” their loans should deposits become “mattress money” …

    • Mustsign topost says:

      I believe there are now plans for supplying warehouses to be filled with crates containing 500 euro notes , possibly in these locations , who knows

  4. Mustsign topost says:

    in the minds of central bankers everywhere, negative interest rates are expansionary: 1/0.95 > 1/1.05

  5. Travis Zly says:

    Once the European political elites got away with stealing €110 billion from the private sector to “save the Euro” during the Greek PSI, there would be no stopping them. Next in line was the theft of €10 billion from the savers of two Cypriot banks, also to “save the Euro”. The next initiative to ensure the transfer of private wealth to the state sector included concerted action against banks to force them to breach confidentiality and reveal “tax evasion” to the “authorities”. The latest act of theft by the political class of Europe is to classify generous tax-regimes among various European states as “illegal state aid” to corporates. As your article rightly points out, the central banks are transferring private wealth to European treasuries by levying a penalty on overnight deposits which banks are passing on to their customers. In the absence of inflation to erode private wealth, states must find alternative avenues to enrich their elites and reward the armies of sycophants who enforce their diktats.

  6. Julian the Apostate says:

    They seem to be BEGGING for a run on their banks. It’ll start as a trickle until people figure out how to segue out of it then BOOM! ARBEIT MACHT FREI indeed.

  7. VegasBob says:

    I wonder how long it will be until the Yellen Fed brings this ‘punishment interest’ insanity to the United States…

  8. TD says:

    In retaliation, the people should use their savings to extinguish all their debt, thus doubly screwing the banks and the ECB. It’s a highly deflationary act, and will put banks out of business. C’mon people, get busy !

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