Spectre of negative rates sends a chill through Britain’s banks

In 1984 Birmingham-based Midland Bank, then one of the UK’s big four banking groups, made a radical decision that fundamentally changed Britain’s banking sector. Concerned about losing customers, it decided to ditch fees for cheques, statements and standing orders. Within a year it signed up to 450,000 new customers and its competitors soon followed suit. But five years ago Hervé de Carmoy, who became chief executive of the bank shortly after it abolished the charges, told this newspaper it was a mistake. 

“In retrospect, you could say it was imperfect reasoning. I don’t think we should have given up a major source of income [like that],” he said. 

Now banking sources say the idea of bringing fees back for those holding money – most likely for large clients – is not impossible after the Bank of England on Monday told lenders it was seriously considering turning rates negative for the first time in its history. Dipping rates below zero, which has already happened in Japan and Switzerland, means banks would be charged for hoarding cash rather than lending it out. The lower the rate, the less profit they make. 

“Bank profits have collapsed because the money can’t be put to use with a good interest margin [the difference between their cost of borrowing and the rate at which they can lend money] in today’s conditions,” says Sir Philip Hampton, the former chairman of the Royal Bank of Scotland. “It’s the opacity on how much banking costs and how it should be paid for which is now being questioned by the interest rate environment.”

John Cronin, a banks analyst at Goodbody, agrees that the imposition of negative base rates would inflict further damage on revenues and so banks will most likely “look at charging business and retail customers with large balances to offset some of these headwinds”.

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