KEY POINTS

  • Banks charge biggest accounts after years of negative interest rates
  • Clients drifting away to private cash storage houses, gold
  • Trump thinks high interest rate in the U.S. is killing investments

Swiss banks are fighting a grim battle against rich clients, who are withdrawing deposits to escape negative interest rates. The banks’ reputation as a secure and reliable place for wealthy investors from around the world is failing to stop the move. The clients increasingly want to hold currency in hard cash or in gold to escape the negative rates, reports say.

Swiss private bankers say that clients are seeking to move large amounts of cash to private cash storage that are doing a booming business, a report on the CNN website said.

The drain is a result of five years of negative interest rates, banks say. The Swiss National Bank has imposed a negative interest regime to keep the Swiss franc weak. It requires banks to pay to park money with the central bank. Some banks have passed a portion of the extra cost to their more affluent customers, earning their disaffection.

Worrying factor

Meanwhile, U.S. President Donald Trump’s love for the negative interest rates is driving shivers up the spines of US bankers. Trump said in his Davos address that the U.S. was at a competitive disadvantage because its rates were higher,  according to a report on the CNBC TV website.

“Even now as the United States is by far the strongest economic power in the world, it’s not even close. … We’re forced to compete with nations that are getting negative rates, something very new,” the report quoted Trump as saying. “Meaning, they get paid to borrow money, something I could get used to very quickly. Love that.”

J.P. Morgan Chase CEO Jamie Dimon told CNBC that negative interest rates were one of the only things that worried him in a market that was otherwise in a “Goldilocks place.” “The only thing I have trepidation about is negative interest rates, QE, and the diversion between stock prices and bond prices and yield and stuff like that,” Dimon said in Davos. “It’s kind of one of the great experiments of all time, and we still don’t know what the ultimate outcome is.”

Swiss banks are already feeling the pinch from years of negative interest rates. “A lot of people [are] thinking about what they should do, and alternatives to this,” the CNN report quoted Adriel Jost, head of economics at Wellershoff & Partners, a consultancy based in Zurich, as saying. Norman Villamin of Swiss bank UBP said a few clients had moved their cash into private storage.

Hard for banks 

Swiss private bank Rahn+Bodmer Co also reported receiving similar requests, according to partner Martin Bidermann. “We tell the client, watch out — it's your money,” he said, according to the report.

“The bank will discuss with the client, if you do these other things with us that allow us to make some money, we won't charge you," Villamin said. “I do think the banks are going out of their way to try and find a way not to charge the large cash holders,” Bidermann said. He added he was aware of similar discussions with clients.

Still, some banks have been forced to levy charges on their biggest account holders after years of extraordinary monetary policy.

Switzerland launched the negative rates regime in 2015 making it harder for the banks to generate a profit on loans and mortgages. Payments on excess reserves that needed to be stored with the central bank also caused pain.

Credit Suisse (CS) began notifying clients of a negative 0.75% interest rate to cash balances above 2 million Swiss francs ($2.1 million) from last year. This meant that if an individual client or business held 3 million Swiss francs ($3.1 million) with the bank for more than a year, they would be charged 7,500 Swiss francs ($7,750). UBS (UBS) also said last year that it would apply a 0.75% fee on cash balances above 2 million francs ($2 million) held in Switzerland.

For clients that wanted to withdraw large sums of cash, the logistics were daunting. First, a customer would need to come up with storage and a costly insurance plan.

Increased interest

Ludwig Karl, a spokesperson for Swiss Gold Safe, which rented safe deposit boxes in Switzerland and Lichtenstein, said that the company had seen increased interest in cash storage since 2015.

Bidermann noted that once a client withdrew a significant amount of cash, he or she could struggle to deposit it again down the line. “Any bank would have questions” if a client arrived with 800,000 Swiss francs in cash five or 10 years from now, he said.