How negative interest rates would impact the transaction-banking industry

By:
Rebecca Brace
Published on:

A short-term liquidity boost would buoy invoice and supply chain finance but it is unclear whether treasury technology could handle the impact of negative deposit rates.

Paul Tucker, deputy governor of the Bank of England (BoE), prompted a storm of headlines last week when he suggested that banks could be charged a negative interest rate. Pointing out that schemes intended to improve lending to small and medium-sized enterprises have not had the desired effect, Tucker said that negative interest rates could be an option – although he added: “This would be an extraordinary thing to do and it needs to be thought through carefully.”

If banks were required to pay the BoE to hold their deposits, they would be encouraged to lend more – at least in theory. Rather than forcing ordinary savers to pay banks for their deposits, a separate deposit rate would be created for banks, as is already practised by the European Central Bank.

However, critics of the idea have pointed out that it is likely that banks would react to the move by cutting rates offered to savers.

Charlie Bean, deputy governor at the BoE
The flurry of concern prompted by Tucker’s comments was short lived: Charlie Bean, another deputy governor at the BoE, described the suggestion the next day as “blue sky thinking” and said that “any suggestion we have a plan to introduce negative interest rates immediately, I should make absolutely clear, is not the case”.

At any rate, it’s unclear Tucker’s proposal will come to pass – and probably serves principally to engender confidence in monetary support. Nevertheless, it’s worth investigating the impact a negative interest rate would have on transaction banks and their corporate clients.

For one thing, banks’ IT systems might not be geared up to support negative rates – and the same might be true for their corporate clients. Where treasury technology is concerned, “negative interest has an impact for as far as the treasury management system is not able to store and calculate with negative interest and yield curve points”, says Bas Rebel, senior director treasury advisory at PwC. “However, there are numerous companies that have had to deal with negative yield on transactions in their system since 2008.”

Nicholas Brewer, senior analyst at Aite Group, says the greatest impact of negative interest rates would be on liquidity. “Assuming that it is the overnight deposit rate which became negative, the main impact would be that banks would be incentivized to provide credit and liquidity to corporations, due to the lack of incentive to deposit money with the Bank of England,” he says. “It is unlikely that this would take the form of a large increase in long-term or project finance, but short-term liquidity around invoice and supply chain finance should become easier.”

That’s the good news – but on the other hand, it is likely that companies would see an impact on their bank deposits. “Even if bank deposit rates were to remain positive, they must surely drop from current rates,” says Brewer. “The question is, where will companies use these funds? Longer-term investment appetite is driven in part by the economic outlook, so without any improvement in the economic situation, it is more likely that corporations will use these funds to pay for current operational costs.”

While it is considered unlikely to happen in the UK, a move to negative rates would not be unprecedented. Sweden’s central bank became the first in the world to introduce negative rates on bank deposits in 2009, applying a rate of -0.25%. Neither is it the first time that the prospect has been aired in the UK: when Sweden went negative, Mervyn King, the governor of the BoE, said: “It’s an idea we will certainly be looking at.”

And if it did come to pass? “A zero rate is only a psychological boundary – a move into negative rates is just another form of rate cut,” concludes Brewer. “Nothing dramatic will happen, but the impact will be in line with that from previous rate cuts.”

Still, negative deposit rates would be virgin territory for the transaction banking industry and few can predict with certainty its impact.