It may be hard to believe for those who availed of it, but it’s 20 years since Ireland’s arguably most famous and controversial savings scheme was launched.
In an attempt to encourage people to take some money – and a bit of heat – out of an economy that was starting to boom, the then minister for finance, Charlie McCreevy, introduced the Special Savings Incentive Account.
The SSIA was a simple idea with a very attractive prospect. For every €4 the saver put into a special account that was left untouched for a number of years, the State added €1.
It was incredibly popular but criticised by some who said it helped fuel the property boom, as well as a wider over-heating of the economy, when the accounts matured.
One financial crash, a subsequent recovery and a pandemic later, governments and regulators have the exact opposite problem and are now trying to encourage people to spend, not save.
Irish consumers – once bitten, twice shy from a brutal recession – have collectively been paying down debt and saving money with considerable gusto.
And the pandemic super-charged the latter practice.
According to the most recent figures from the Central Bank, collectively we put €950m on deposit in December alone, bringing deposits to an historic high of €125bn, representing growth in savings of around 13% last year.
Rock bottom rates
For several years now, Central Banks been trying to encourage people to spend their hard-earned cash, and even borrow some.
One instrument they use to do that is interest rates.
By dropping rates to zero at the European Central Bank level, banks in the euro zone can notionally get access to very cheap money and distribute loans to businesses and consumers at low rates.
At the other end of the scale, it makes saving money less attractive because the banks are offering negligible returns for deposits.
So determined was the ECB to get money flowing in the euro zone economy that they introduced negative interest rates on deposits, first doing so almost seven years ago now.
How can they offer an interest rate below zero?
The practice of levying negative interest rates has become commonplace in recent years.
Negative rates are now frequently charged on government debt, which effectively means an investor who buys a government bond pays interest on it, which sounds counter-intuitive when they’re supposed to be making money from the government on it.
Similarly, at least one Danish bank has applied negative rates to mortgages, meaning the mortgage holder actually gets a small return from the bank every month when they make their loan repayment.
When it comes to deposits, the ECB has been charging banks for parking excess money (above that which they’re required to hold in reserve) in the ECB’s overnight deposit facility, moving from a rate of -0.1% in 2014 to -0.5% now.
In other words, it’s costing the bank to hold our savings and deposits.
“Every incremental €1 billion deposited with the ECB in excess of minimum requirements equates to a charge of €5 million,” Davy banking analyst Diarmaid Sheridan points out.
That’s a significant hit to income at a time when lending rates are also falling and consumers, on the whole, are reluctant to borrow.
Why don’t they charge us for deposits then?
So far, they’ve held off from doing so, except for larger institutional and corporate depositors.
Credit unions, for example, are being charged for lodging their own customers’ deposits into the banks, explaining why many have now started placing limits on individual deposits from their members.
Bank of Ireland wrote to pension fund investors last summer advising them of its intention to charge negative interest rates for holding cash.
The bank’s chief executive Francesca McDonagh also indicated that the bank was to start levying negative rates on SMEs (small and medium sized corporates) with deposits in excess of €2.5m.
AIB charges negative rates to businesses holding more than €3m in their accounts while it has cut rates on most personal accounts to zero.
The bank previously indicated that it would look at imposing negative rates on high-net-worth individuals with balances of more than €1m.
Ulster Bank also charges negative interest rates on savings over €1m held by business customers and institutional clients.
Are regular savers next in line?
Negative rates for retail customers are already here.
The German digital bank N26 became the first bank to move in that direction confirming last October that it would charge negative rates on deposits in excess of €50,000 (with the rate being charged only on the portion above €50,000).
The Sunday Times reported in recent weeks that some of the main pillar banks were seeking to broaden the base of deposits that would be subject to interest rates.
Customers with large account balances would be targeted initially in the move which, the paper said, would likely be led by AIB.
In a research note, Diarmaid Sheridan of Davy said the dual challenge for banks of significant increases in deposits and negative interest rates was unlikely to change for years.
“There is an inevitability to the introduction of negative rates into retail deposits to offset some of these headwinds,” he said.
Is this going to happen soon?
One banking insider said the phasing in of negative rates on retail deposits was likely to happen sooner rather than later, but that they would be introduced on a phased basis and at a very high level of savings initially – perhaps €500,000 – and gradually reduced from there over time.
He said the first moves could possibly be announced in the coming weeks when banks publish their full year results and Ulster Bank is expected to announce its future plans for the Irish market.
“If Ulster Bank were to exit, a big chunk of deposits would be needing a new home and no bank – other than maybe KBC – wants to receive that.
“The banks are likely to want to make any new policies clear and get them out there before any of that money might start to migrate and find a new home rather than creating a fuss in six months’ time,” he said.
KBC, for its part, has said it has no intention of introducing negative rates at this time.
Speaking to RTÉ on the publication of its full year results this week, the bank’s chief executive in Ireland said it was in the unique position in the market here of being able to source beneficial funding rates from its Belgian parent, which he described as ‘hugely over-liquid’.
“I don’t see any need today to start considering negative rates for retail deposits, far from it,” Peter Roebben said.
How much would negative rates cost me?
Assuming that the main banks do start levying negative rates on deposits, it depends on what rate they apply and on what level of savings.
Starting at €1m would affect a small, but significant enough cohort of savers.
According to Central Bank figures from the middle of the last decade, close to 1,800 households had deposits in excess of €1m. That number has likely grown since.
If we take the €500,000 threshold and assume the banks apply the full -0.5% rate to the full amount of savings, that would amount to a charge of €2,500 a year.
We have €100,000 saved for a deposit on a house. If they gradually reduce the threshold, how much might it cost us?
A few years ago, you could have realistically expected to get a return of 1.5% per year on that deposit.
That would equate to €1,500 interest, on which DIRT (Deposit Interest Retention Tax) of 33% would be applied.
That would have left you with a net return of €1,000 – a nice boost to your nest egg.
If we assume the bank eventually introduces negative rates on amounts above €50,000 – as in the case of N26 – and passes on the full -0.5% ECB rate, in this new scenario that same €100,000 would be eroded by €250 per year by sitting in your deposit account, or by roughly €20 per month.
It’s not a massive loss in the context of the size of the saving, but it would be an alarming new departure for a habit that we’re so used to getting rewarded for.
Added to that, if and when inflation picks back up, the real value of your savings could be further eroded.
Are there alternatives to deposit accounts?
As part of this process, the banks are widely expected to introduce some low-risk investment products that would allow them to direct individuals with large deposits towards some alternatives and hopefully dissuade people from hoarding cash at home.
From a banking perspective, that largely solves the problem.
Deposits would become an asset with some fee income attached rather than a cost liability and the banks would not be pushing back against valued customers who may be bringing unwelcome negative rate deposits with them.
“This is the long-term solution. They’ll be invested in short term government bonds or short term highly rated investment grade corporates,” one banker explained.
“They’d be very low risk, but they won’t be zero risk.”
But then large deposits are no longer risk free either with rules around ‘bail-ins’ meaning that deposits over €100,000 can be hit in the event of a bank getting into difficulty.
Negative interest rates are coming, but it may be a while yet before most of us feel the pinch.