Paying interest on your savings account: Why it’s necessary, but we don’t want to do it

Low and negative interest rates on savings accounts Watch the video

It’s no picnic, getting practically no interest on your savings. Our free-withdrawal Direct Savings account, for instance, pays 0.01% interest. There’s been a lot of news lately about clients being charged negative interest rates, that people will have to pay their bank to keep money in a savings account. This doesn’t sit well with the Dutch, and we at ABN AMRO don’t like it either. That’s why we’ve decided not to charge clients negative interest on savings accounts up to 100,000 euros. Here’s why we’ve taken this decision and why interest rates are so low.

I used to get a few percent interest on my savings. Why have interest rates on savings accounts fallen in the past few years, to almost 0%?

There are a number of reasons why. To start with, the European Central Bank (ECB) plays an important role in this. The ECB monitors all large national banks in the eurozone. Just like you have a current account with your bank, banks hold a kind of current account with the ECB or De Nederlandsche Bank (DNB, the Dutch central bank). They deposit money on this account that they don’t need right away, such as part of your savings. Most European banks receive more savings than they need, and they have to put that money somewhere.

The ECB/DNB used to pay banks interest on their deposits. But that is no longer the case; since 2014, banks have had to pay money for these deposits – that’s negative interest. Since September 2019, that negative interest rate has been 0.5%. This means that for every one thousand euros we deposit with the ECB/DNB, we pay 5 euros in interest. We’re talking about deposits of billions of euros, so that’s a huge amount of interest. ABN AMRO had to pay the ECB around 100 million euros in interest in 2018. And the interest rate charged by the ECB is expected to increase even more.

Why did the ECB decide to charge negative interest rates?

The ECB charges negative interest in order to stimulate the economy and inflation (monetary depreciation). The average inflation rate in Europe has been very low for several years – well below the 2% that the ECB says is ideal for a healthy economy. If the ECB lowers interest rates, businesses and individuals can borrow money more cheaply. They then spend this money, which the ECB hopes will stimulate the economy. And when the economy improves, inflation usually rises.

Why are people putting so much money in the bank if they’re hardly receiving any interest?

It’s paradoxical: since interest rates have been historically low, people in Europe have been saving more. That’s probably because they’re being cautious, due to uncertainty caused by Brexit, impending trade wars and especially the ageing of the population. When people get older, they start thinking about their pension and put more money aside, certainly now that pensions are under pressure.

But aren’t pensions under pressure because interest rates are low…?

That’s right. Pension funds and pension insurers invest part of the contributions they receive in bonds and government loans. But bond yields have dropped so low that the money in pension pots is hardly growing. Plus, low interest rates are driving up pension funds’ commitments. And then there’s the question of whether there will be enough capital to pay out pensions in the future. But that’s not all – due to low interest rates, some people prefer to invest their money in homes. As a result, house prices continue to rise, possibly creating a housing market bubble. First-time home buyers then have a harder time getting a mortgage because mortgage providers say they’re not earning enough to justify taking out such a large loan. So low interest rates affect consumers in many ways. There are benefits, though – mortgage interest rates are historically low.

Banks could use clients’ savings for lending instead of depositing them with the ECB. If you lent that money, you could get 2% mortgage interest on it – much more than the 0.01% you’re paying savers.

We’re trying to do that wherever possible, but because many people take out a repayable mortgage loan and house prices are high, the mortgage portfolio isn’t growing much. Nor are other loans. In other words, savings are growing faster than the pace at which we can lend that money, even if we wanted to. So we have no choice but to deposit that surplus money with the ECB and to pay negative interest on it.

Is that why some economists are saying that banks should actually charge retail clients interest on their savings?

Negative interest rates are putting pressure on banks’ incomes. Economists do not expect interest rates to rise quickly in the next few years. So banks need to be creative, for example by cutting costs or charging retail clients negative interest. We’re struggling with this and have decided not to charge clients interest on savings up to 100,000 euros. We don’t want clients to take their money out of the bank and put it under their mattresses. After all, your house could catch fire or could be burgled. That’s why we think ordinary savers with a financial buffer should be able to trust that they won’t have to pay negative interest on their savings. We believe this role befits a bank that takes its social responsibility seriously.

Savings deposits above 100,000 euros

Our payment and savings terms and conditions are set to change on 1 April 2020. One of the changes is that the bank will charge clients negative interest on total balances in excess of € 2,500,000 from 1 April. Clients will receive a letter or email informing them about this between 15 and 24 January. 

For more information, see: (Dutch only) and (Dutch only).