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SNB raising negative rate threshold may halve burden on banks - analysts

SNB raising negative rate threshold may halve burden on banks - analysts
The Swiss National Bank (SNB) is seen in Bern, Switzerland September 3, 2019. REUTERS/Arnd Wiegmann -
Arnd Wiegmann(Reuters)
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By John Revill and Angelika Gruber

ZURICH (Reuters) – The Swiss National Bank’s decision to raise the threshold for the country’s banks before they are hit with negative interest rates could halve the amount they end up paying the central bank, analysts’ calculations suggest.

The SNB on Thursday increased the exemption threshold above which commercial banks who park their money with the central bank have to pay the negative interest rate of 0.75% on those deposits.

In 2018, the country’s banks paid nearly 2 billion Swiss francs (1.60 billion pounds) in negative rates – one of the tools used by the SNB to reduce investor appetite for the safe-haven Swiss franc.

Under the new rule, which takes effect on Nov. 1 and can be adjusted monthly, the amount banks can store with the SNB before negative rates are applied increases to 25 times their minimum reserves from the current 20 times.

“According to our estimate, which is based on incomplete data, around 113 billion Swiss francs will be additionally exempted from the negative policy rate, reducing the burden on domestic banks by around 840 million francs yearly from around 1.4 billion francs,” said Credit Suisse economist Maxime Botteron.

“But if you include the foreign banks and other financial institutions in Switzerland, the total payment for negative interest rates last year was closer to 2 billion and following this change the amount they will save may be even bigger.”

Negative rates, which have been in place for nearly five years, have aroused opposition in Switzerland because they act as a charge on the banks, and by lowering the general level of interest rates have reduced the returns for pension funds.

The Swiss Bankers Association said the SNB’s move was a step in the right direction, while some banks welcomed it also.

It was not entirely clear what prompted the SNB to make the change, said David Oxley of Capital Economics, although the change opened the way to interest rate cuts in the future.

“One possibility is that the Bank is simply throwing a lifeline to the cantonal and regional banks whose asset margins have been squeezed hard by negative interest rates,” he said.

“However, we think it more likely that the increase in the threshold limit is laying the groundwork for a rate cut at some point.”

(Reporting by John Revill and Angelika Gruber; Editing by Hugh Lawson)

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