In yet another sign the financial world is being turned on its head, one of the UK’s biggest banks has warned customers that it may saddle them with negative interest rates. That is, depositors would be charged for putting their money in the bank.
Royal Bank of Scotland, one of Britain’s largest banks, and Natwest, one of its subsidiaries, sent letters to 1.3 million business customers warning them of the change, citing low interest rates. The letter announcing the changes said: “Global interest rates remain at very low levels and in some markets are currently negative. Dependent on future market conditions, this could result in us charging interest on credit balances.”
Some central banks already charge commercial lenders for their deposits, and interbank lending markets have also featured negative interest rates. A third of government bonds globally now have yields below zero, meaning investors won’t get all their money back if they hold the securities to maturity.
Foisting negative rates on regular business customers is a much bigger step—if RBS went through with it, it would be the first in the UK to do so. A big Dutch lender, ABN Amro, is flirting with a similar idea.
As weird as it sounds, negative rates don’t necessarily lead to an exodus of customers. Swiss bank Alternative Bank Schweiz began charging interest on balances for all of its clients this year, and managed to eke out small net gain in customers in the months after the change, according to the Wall Street Journal (paywall).
In Denmark, the euro zone, Japan, Sweden, and Switzerland, central banks’ benchmark interest rates are below zero, putting a strain on banks ability to make money from lending. The Bank of England is widely expected to cut its main interest rate (paywall), currently 0.5%, at its next policy meeting on Aug. 4, but not drop below zero. Yet. Amid the economic turmoil following the Brexit vote, nothing can be ruled out.
An RBS spokesperson said: “We will consider any necessary action in the event of the Bank of England Base Rate falling below zero, but will do our utmost to protect our customers from any impacts. We have no current plans to pass negative rates through to personal or business customers.”
Negative rates aren’t all bad news for bank customers. If you’re in the market for a loan, you can actually make money from borrowing at some banks. In Denmark, a financial quirk in some mortgages means that customers could be paid for taking out loans as rates there steadily fall further below zero.