Patience wearing thin for negative interest rates

SNB chairman Thomas Jordan was on the defensive in a room full of private bankers Keystone

Negative interest rates are the bane of the financial sector – and the longer they remain, the louder bankers cry foul. The Swiss private banking and asset management lobby groups invited both the central bank chairman and finance minister to explain themselves.

Since introducing a negative rate of interest in January 2015, the Swiss National Bank (SNB) has charged domestic banks more than CHF3 billion ($2.97 billion) for the privilege of parking cash in its vaults.

Ultra-low interest rates over the last few years has also played havoc with traditional investments, such as bonds, which has hit the banking, insurance, asset management and pension industries.

Financial players vented their frustration at the Private Banking Day in Zurich on Thursday. Yves Mirabaud, president of the Association of Swiss Private Banks, complained that the specific rules governing negative interest rate charges on so-called sight deposits at the SNB had always discriminated against pure wealth managers.

But he noted that “the voices criticising negative interest rates have become louder and more numerous. We no longer feel alone.” He added that he hoped future conditions might allow “our central bank to loosen its stranglehold” on interest rates.

Those conditions will largely be dictated from abroad, particularly by the European Central Bank (ECB). SNB Chairman Thomas Jordan said Switzerland’s monetary policy was a hostage to weak economic conditions in some EU states, which prompted the ECB to print trillions of euros and move euro interest rates into negative territory.

This forced the SNB to abandon its franc-euro peg and plunge Switzerland’s interest rates into the red. “We have a situation where people want the franc so much, they are willing to pay [negative interest charges] for it,” Jordan said. “Monetary policy can only change once that situation changes.”

‘Home-made problem’

But not everyone was willing to accept Jordan’s ‘my hands are tied’ argument. Herbert Scheidt, chairman of the Swiss Bankers Association, bemoaned the fact that Swiss banks were charged CHF1.5 billion by the SNB last year alone. “That money could have been spent on much more useful things, such as improved IT systems,” he said. 

He added that low interest rates had encouraged people to hoard cash rather than invest. “This is a home-made problem,” he said, pouring cold water on Jordan’s argument that the blame lies entirely outside of Switzerland.

The Private Banking Day organisers even invited along German economist Hans-Werner Sinn to help them ram home the point that negative interest rates are bad. Sinn warned that the countries most likely to suffer from such monetary policy are those where house prices have risen rapidly in recent years – Switzerland, Germany and Austria. These are the places most likely to experience high levels of mortgage defaults when interest rates start to go up again.

For his part, Swiss Finance Minister Ueli Maurer said that government policy was aimed at improving the position of Swiss banks in Europe and the wider world. The government is intent on securing future EU access for Swiss financial players, reducing the costs of regulation and administration and solving long-running tax evasion arguments, he told financiers.

ECB bashing

The SNB’s Thomas Jordan is not the only central banker to feel the heat of mounting criticism over monetary policy. On Wednesday, European Central Bank president Mario Draghi was given a hostile reception by Dutch politicians at the Hague.

Tempers sometimes flared during the two-hour meeting that questioned the ECB’s record on transparency and its policy of spending €60 billion per month on mainly government bonds. Dutch MPs said the policy drove up housing prices to dangerous levels and weakened investment returns for pension and insurance funds.

Draghi was forced onto the defensive, saying the quantitative easing policy had created four and a half million jobs. He added that pension funds would eventually thank the ECB for fixing the eurozone economy that was in danger of collapse before the intervention.