Punishment Interest

Deutsche Skatbank, a division of VR-Bank Altenburger Land, which was founded in 1859, is not the biggest bank in Germany, but it has become the first bank to confirm what German savers have been dreading for a while: the wrath of negative interest rates or Punishment Interest.

Retail and business customers of Deutsche Skatbank with over €500,000 on deposit as of November 1 will earn a “negative interest rate” of 0.25%.

“Punishment Interest” is what Germans call this. This has sparked fierce debate in a country where “Sparsamkeit”, or thriftiness, is next to godliness.
According to a poll for the Association of German Banks, Germans said their top priorities for saving were for :

· “old age” (30%)

· “emergencies” (27%)

· “major purchases” (27%)

Only 7% mentioned “building wealth”. Asked about the most important criterion for an investment, 60% said “security” and only 15% said “returns”.

The initiative by Deutsche Skatbank, which is being slowly followed by other banks in Germany and abroad, seems to prepare the way for a new concept of banking as a service to be paid for.

Commerzbank AG announced on 20 Nov that it would soon begin charging large corporate clients and asset managers’ fees on certain accounts to discourage large deposits, which is a reaction to European Central Bank stimulus policy.

With effect from June 2014, the ECB has charged banks an annualized fee of 0.1 percent – a negative interest rate – to keep reserves at The Central Bank. The rate went to negative 0.2 percent in September. The ECB did that in order to try to motivate banks to lend reserves to each other – which would be less costly for them than leaving excess reserves sitting in their own accounts, costing interest.

As the concept of negative interest rate begins to grab headlines, you might well wonder what Impact this would have on your investments. To know more about interest rates and how careful planning can help you take advantage of interest rate arbitrage, contact one of Dino Zavagno’s team at Gladstone Morgan Info@gladstonemorgam.com

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