Two Danish banks and a Swiss bank have already told their wealthy clients that deposits over a certain amount will cost them (the clients) money. That is only the beginning, and we expect other banks to follow if the ECB lowers interest rates further.
It is indeed a new era in banking when banks begin to charge negative interest rates on deposits. Unfortunately for people with savings, this is unlikely to change over the coming five to ten years.
With a possible economic recession currently looming on the horizon, it was not surprising that the ECB lowered its official interest rates last week. A disorderly Brexit could be the straw that breaks the camel’s back and triggers another cut in interest rates.
The fixed income market certainly does not expect a raise in interest rates in the near future, with yields on 30-year German government bonds already around negative territory (as discussed in our previous Newsletter).
With the exception of the above-mentioned Danish and Swiss institutions, banks’ private clients have not yet been penalised for having deposits. However, that will change if the ECB lowers its interest rate again to somewhere between -0.5% and -1.0%, at which level most banks would not be able to sustain losses of up to one percent on private deposits, and would therefore be obliged to begin charging interest on them.
Although many corporate clients have been facing this situation for some time, it would be a new phenomenon for private clients, many of whom will have to consider their options. The choice is not easy from a risk perspective, because it would entail moving deposits into other investment types.
Figure 1 Required investment with 7% return on alternatives
People with savings will basically have two target lines, or thresholds, to consider, the first being to secure that they do not lose money, and the second being the retention of the real value of their savings.
Figure 1 shows these two thresholds (the calculations are based on the long-term return target of Quantrom P2P Lending DAC of 7% per annum and an inflation rate of a modest 1% per annum).
Private clients obliged to pay 0.5% for holding a deposit at a bank would be required to invest approximately 7.5% of their savings in an asset with a return of 7% in order NOT to lose money.
To protect the real value of their savings, such clients would need to invest almost 22% of these savings in an alternative where the return exceeds an inflation rate of 1% per annum.
In the following table we have made calculations based upon an actual saving of EUR 100,000.
Table 1 Required investment with 100,000 EUR savings and 7% return on alternative
Quantrom P2P Lending offers such an alternative. During the last 12 months, our investors have received a return of just under 8% with a stable monthly return of 0.65%, and have thus been immune to the volatility seen in other markets such as equities.
In order to protect the real value of your savings when the inflation rate is 1%, you would have to invest less than 30% of those savings. Of course, there are risks associated with all investments, including investing in Quantrom P2P Lending DAC. However, even in the worst-case scenario, where you could lose your entire investment, more than 70% of your savings would still be safe in the bank with a guarantee from the government.
Furthermore, if the alternatives are negative interest rates on government or mortgage bonds, or the highly volatile equity market, investing in the real economy with positive interest rates seems like an interesting prospect from a risk-reward perspective.