Right now, having money in your current account has become a problem: a problem for banks and a problem for bank users. The level of bank fees imposed on money kept in current accounts is disproportionate. They are charging us for having the money deposited and the only way to avoid paying this commission is to invest in one of their financial products: an investment fund, a retirement product… This is happening at most banks across Europe. Will we go back to hiding the money under a tile or the mattress?

Why do banks charge for deposits?

The answer is because negative interest rates are hurting the banks’ income statement. Therefore, having customers deposit their money in the bank generates a cost and no benefit. 

Suppose we deposit €10,000 into our current account at the bank. The bank has to keep this money and have it available for you at all times. If there are 100 people who all deposit €10,000, the bank will have €1,000,000 in its hands. With this amount of money, the bank can do two things: either lend it, or keep it in cash. Lending it carries a risk, and keeping it in cash entails a number of costs, either due to the need for high-security storage, or the option of making a deposit with the European Central Bank.

Why do ECB deposits have a cost?

The deposit at the European Central Bank has a cost of -0.50% for banks. This means that, in order to deposit the million euros of the example, the financial institution would have to pay approximately €5,000 in cost.

The aim of the European Central Bank for maintaining negative interest rates is to push financial institutions to increase lending to businesses and consumers, and thus reactivate the consumer economy. The European Central Bank has also chosen to penalise savings with the aim of moving, investing, and spending money. The idea is to boost the economy and alleviate the continent’s meagre macroeconomic outlook.

However, due to the incidence of COVID-19, household savings have increased and, therefore, there has been an increase in liquidity, and the value of deposits has been increasing. Thus, due to negative interest rates, banks have had to pay large sums of money to deposit all this liquidity in the European Central Bank. 

As banks get negative returns on liquidity, they no longer want to raise more money, and have stopped offering fixed-term deposits and remuneration in their accounts. Far from our reach is the financial memory of 2008, when the EURIBOR was above 5% and there were deposits that gave you 10% or 11% APR a month. Or others, which gave 7.5% APR in three months; or 5-6% deposits in the medium and long term. If one day we have such deposits again, it will be because the EURIBOR will have risen again.

Are the tile or the mattress back?

However, the solution is not to keep money inside the mattress or under the tile, as the loss of the value of money, due to inflation, also reduces our purchasing power. Right now, the solution to all this mess is a pretty complicated equation about what I want to do with the money saved, how long I want to keep it off, and so on. These and other questions can guide us on what we can do about it. But that’s a horse of a different colour.

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