A tiny Swiss bank specialised in financing social and environmental projects will on January 1 go where no retail lender has gone before, applying negative interest rates on individual clients.
The Alternative Bank Schweiz (ABS) caused shockwaves with a letter sent to all clients in mid-October informing them that it would begin imposing interest charges on deposits in 2016.
For current accounts, the bank said it would impose a -0.125-percent rate, while slapping a -0.75-percent rate on client deposits higher than 100,000 Swiss francs ($98,650, 92,420 euros).
So far individual depositors have been shielded from the burn of decisions by several central banks, including Switzerland’s, to introduce negative interest rates to light a flame under growth or ward off unwanted currency investors.
ABS, which grew out of the ideals the 1960’s protest movement, justified the unprecedented development by saying it would provide manoeuvering room for financing “meaningful projects”.
The move did not go unnoticed in Swiss financial circles as banks in the wealthy Alpine nation search for ways to deal with the negative rates imposed on them by the central bank in January.
“This decision on negative rates is costing us a lot of money — pretty much the equivalent of our entire annual profit last year,” ABS chief Martin Rohner told AFP.
The Swiss central bank introduced a negative deposit rate in January after it abruptly abandoned its three-year effort to hold down the franc’s exchange rate to protect exports.
The -0.75 percent rate is meant to dissuade foreign investors buying and holding Swiss francs as a safe haven investment, which had been putting upward pressure on the currency.
In the weeks that followed that rate decision, several Swiss banks, including giants UBS and Credit Suisse, decided to pass on some of the pain to their larger institutional clients.
None of them however imposed interest charges on individual depositors.
“We have determined that applying a negative rate was a more transparent and fairer solution for our clientele,” Rohner said, insisting this was a better solution than upping management fees.
Some clients did not see things in the same light, jumping on the phone to demand explanations from their bankers.
– Some clients ‘surprised’ –
“We have had clients who were surprised but who after talking with us on the phone understood in the end,” Rohner said, adding that most clients had accepted the move.
Some remained critical, he acknowledged, but stressed that the bank’s clientele in general was not made up of people who accept top-down decisions sitting down.
Based in the central town of Olten, ABS counts the Swiss branch of environmental group Greenpeace and the Swiss Green Party among its founding organisations.
The bank describes itself as an ethical organisation focused on backing firms investing in social and environmental projects.
With its balance sheet totalling nearly 1.6 billion Swiss francs last year, most of its activities are concentrated in cooperative housing projects, providing affordable housing and sustainable energy solutions, as well as organic farming.
Other projects it has backed include a youth circus and a company creating a new kind of electric bicycle.
In its annual study on the sector, the Swiss Bankers Association found that the central bank’s negative rate decision was hitting most of all banks specialised in wealth management, and that most preferred taking on the cost themselves for fear of seeing their clients abandon ship.
Rohner said some of ABS’s clients had voiced fears the bank’s move “would open the door for big banks to start applying negative rates on individuals.”
He said it was still too early to tell how many clients ABS would lose over its move, but insisted there were no signs yet of mass customer flight.
He also said the opening of new accounts was expected to compensate for the departures through the end of the year.
“With all the media attention, we have seen new clients arrive who did not know about us before and who want to sign up since they share our values,” Rohner said.