SNB Introduces Stealth Negative Rate to Protect Money Market

(Bloomberg) — The Swiss National Bank may have cut its interest rate to zero, but the way it penalizes banks’ excess reserve holdings means lenders will face negative rates if they park too much cash at the central bank.

Swiss banks can hold up to an unchanged 18 times their minimum reserve requirement in sight deposits at the SNB for free. For anything over that they will be charged interest of -0.25% as the discount from the policy rate remains unchanged at 25 basis points, the institution said in a statement on Thursday.

The goal behind the “tiered remuneration” is to incentivize lending between banks so that enough liquidity is exchanged on the Swiss money market. For lenders holding more than their limit it’s cheaper to pass on excess reserves to institutions which are under their thresholds, because they have to pay them less than the central bank.

For all lenders which don’t have a minimum reserve requirement the threshold is set at 10 million francs ($12 million) in sight deposits, the SNB said.

The system, which the SNB has had in place since it lifted its key rate above zero in 2022, means that the average money-market rate — known as Saron — has usually been a few basis points below the central-bank rate. 

From Friday on, negative funding costs for banks are therefore likely, as board member Petra Tschudin told reporters in Zurich. She added that she expects only “very little” sight deposits to be remunerated at the negative rate. That chimes with experience from some three years under the regime, where typically only a tiny fraction of them were hit by the lower rate. 

Switzerland’s main banks lobby called the SNB’s decision “understandable,” but criticized its consequences.

“It’s clear that a zero interest rate environment diminishes the incentive for responsible saving and places additional pressure on retirement provision,” the Swiss Bankers Association said in a statement. “As in previous periods of low interest rates, banks and their customers once again bear a significant share of the monetary policy burden.”

Similarly, the insurance association welcomed the SNB not going negative, but stressed that “even the return to a low interest rate environment already poses a challenge” to the sector.

SNB President Martin Schlegel acknowledged the discomfort the new rate environment creates for banks and signaled that there’s an elevated bar for further cuts. 

“We would not take the decision to go negative lightly,” he said. “But I want to stress that the profitability of banks is not within the national bank’s objectives.”

Given the small share of deposits affected, it’s unlikely that the SNB will make a lot of money from charging lenders. Between 2015 and 2022, the central bank earned almost 12 billion francs from negative rates, though it then paid out 14.5 billion francs from when rates turned positive through the end of March of this year.

–With assistance from Paula Doenecke, Jan-Henrik Förster, Levin Stamm and Noele Illien.

(Updates with comments from insurance lobby in ninth paragraph)

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