Negative Interest Rates Charged by Cyprus Lenders, Only the Start, Warn Experts

Going forward, corporate clients will pay a fee on their deposits, which will end up affecting consumers ultimately, turning the traditional concept of banking on its head.

The banks say they’ve got no choice, since they themselves are being charged increasingly high interest rates, along with increasing requirements on their reserves with the ECB (the European Central Bank).

On Tuesday, Bank of Cyprus (BoC) joins Hellenic Bank in charging certain corporate clients a fee on their deposits. Broadly, it will charge a negative interest rate of minus 0.4% monthly on the available account balance, but only on that amount that is over and above EUR €100,000. (Please note that the first EUR €100,000 is exempt).

Like other lenders, Bank of Cyprus itself pays the European Central Bank (ECB) a fee of 0.5% for maintaining any excess liquidity. However, in spite of the growing pressure, the bank reassure that the Negative Interest Rate Policy (or Nirp) will be a selective one.

Bank of Cyprus’ Corporate Affairs Director released a statement regarding their plans to combat the hard-economic times; at this stage he reveals the bank will start charge 0.4% interest on all corporate account deposits, however this will only apply for large clients with corporate accounts. They hope to include semi-governmental entities like the Electricity Authority of Cyprus with multi-million euro level accounts in a bid to increase funding to cover costs associated with the increasing checks and more strict procedures; as per the European Central Bank.

Indeed, although Nirp and quantitative easing alike have failed to achieve their nominal objective – to stimulate growth through increased spending by discouraging saving.

Mr Savvakis Savvides is an economist and former senior manager at the Cyprus Development Bank, likens Nirp to the thin end of the wedge. “Negative interest rates on corporate clients’ accounts mean that the banks are granted a right to be taxing the productive economic agents of the country.

“Banking is not a luxury that companies and households can do without or opt out from. A payments system is an absolute necessity in a modern society as there is no other option available to function and participate in economic activity. If there was a public banking service in place for example, then maybe there would be another (probably much cheaper) choice.”

He added: “In addition, it would also put in place a competitive hurdle for the private banks to jump over. The idea is that in a healthy economy private banks compete for the business of their customers and that this ensures that value is delivered.”

According to Savvides, money has no intrinsic value. “It gains value and therefore has a price (the interest) when one can benefit from using it for a time (by borrowing). For this to happen however borrowers should be creditworthy and there should be sufficient domestic demand; currently Cyprus has very little of neither. Moreover, Domestic demand is suffering as a result of the indebtedness there are not many viable investment opportunities in the economy. For example, Businesses and households are highly indebted and generally cannot repay their existing debts. So, they are not creditworthy to receive another loan.

The economist predicts that negative interest rates will further harm the Cyprus economy. Whereas some won’t shed a tear for cash-rich corporations being forced to pay for holding their deposits in a bank, that’s missing the point, says Loukas Aristodemou, head of the Association for the Protection of Consumers and Quality of Life, a registered NGO.

Aristodemou will be attending a session of the House ethics committee on March 4th, where MPs will be revisiting the matter of bank charges and commissions.

The governor of the Central Bank of Cyprus (CBC) is expected to be present. The CBC has been compiling and comparing data on bank fees from here and overseas and is expected to present its findings to the finance minister in the coming days.

The matter came to the fore last November when Bank of Cyprus telegraphed a pending hike on its commissions and charges, pertaining to services such as processing utility bill payments, cash withdrawals and cheque issuance.

In several cases, the charges were set to double- with complaints stating their similarity to a poll tax. At the time the lender said its goal was to cut its costs by incentivising use of its digital platforms – but lawmakers said this was punishing people such as the elderly who aren’t tech savvy.

The law in question is the ‘Comparability of fees related to payment accounts, payment account switching and access to payment accounts Law of 2017’. Under Section 19, where the Central Bank determines that fees charged by credit institutions for payment services are ‘unreasonable’, it makes a relevant recommendation to the finance minister.

The recommendation factors in various criteria, one of which must be national income levels. The current legislation is fuzzy, in that it doesn’t define what ‘unreasonable fees’ are. Based on the Central Bank’s guidance, the finance minister may then issue a decree concerning payment services fees. The decree is published in the government gazette, acquiring the force of law.

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