Swiss banks, faced with the stark reality of negative rates, are taking to mean measures: Information obtained by finews.ch shows that some Swiss banks are charging customers in excess of the interest the banks themselves are asked to pay the central bank for cash holdings.

The complaints about harsh market conditions have become the mantra of our times – no annual report without mention of how negative rates hurt the earnings of the banking industry. The Swiss central bank (SNB) has been charging 0.75 percent on certain deposits for the past two years.

The banks have adjusted to the challenges though. Today, they even exploit their position in relation to institutional clients with high cash holdings. They sometimes demand a substantially higher charge from such customers than the actual negative rate set by the SNB, several institutional clients told finews.ch.

«The charge to some extent is being passed on not just as such, but with a margin charged on top,» said one chairman of a Swiss life insurer in an interview with finews.ch. This margin at times is outrageously high: «For portfolios with high liquidity they ask for as much as 3 percent interest. That's akin to boosting their margin.»

Interest Charged on Interest-Free Holdings?

This experience is being confirmed by a finance expert at another Swiss company: «A bank once wanted to charge us a 1 percent interest penalty on cash holdings.» Without a proper explanation: «I suppose the bank was looking for margin.»

The customers faced with such demands from their banks didn't want to have their names published. Not surprisingly: nobody wants to risk an already fraught relationship with a bank. And those institutional clients who aren't paying negative rates at all prefer to keep their competitive advantage to themselves.

Some of the clients say that banks are charging negative rates even though they themselves don't have to pay any on their holdings at the central bank because they are under an exemption threshold before the charges kick in. These are mainly bigger companies which have more leeway to adjust their capital base due to the breadth of their business portfolios.

«Utterly Unacceptable»

The statements by the institutional clients are nigh on impossible to verify, because they don't want to see their names in the media and also because the central bank doesn't say which banks have are ponying up the 75 basis points.

Hanspeter Konrad, the director of the Swiss pension fund association ASIP however confirmed that banks indeed applied those extra charges on cash holdings, something he deems «utterly unacceptable».

Making money by charging pension funds extra in passing on negative rates was not on: «This 'business model' – courtesy of the central bank – lowers the rate of return of pension funds and boosts the profits of the banks,» Konrad said.

Flexible Application

In 2015, Swiss banks paid 1.2 billion Swiss francs to the SNB in charges on deposits of 160 billion francs. Last year, this amount probably has risen to about 1.4 billion francs.

Of the four biggest Swiss banks – UBS, Credit Suisse (CS), Raiffeisen and Zuercher Kantonalbank – only Raiffeisen didn't pay any negative interest last year.

CS is charging institutional clients and big corporate customers a commission on the holdings, according to a spokesperson: «The said rules are continuously adjusted to the latest interest and market situation.»

UBS, Switzerland's biggest bank, «passed on those negative rates to our institutional clients, to professional clients», finance chief Kirt Gardner said last week.

Basel III Requirements

The level charged for Swiss franc deposits isn't fixed and a result of negotiations. This makes sense from the point of view of the banks, which are fighting to retain an interest margin in the current, tough environment. But instead of passing on negative rates to all customers, they restrict themselves to the large customers.

In other words: Banks are findings ways of refinancing the interest penalty charged by the SNB. They therefore are charging some of their clients more than the 0.75 percent they in turn are forced to pay.

The two big banks, UBS and CS, have good reasons to justify their strategy: The capital requirements imposed by Basel III mean that banks are forced to protect themselves against potential outflows of money belonging to big institutional clients by way of liquidity cushions.

All Measures Available Will Be Used

They are also prohibited from using certain client holdings for refinancing purposes. It is those requirements that the banks are using as way of explaining their commissions and negative interest charges.

The banks are using all the leeway available to make up for the interest charged by the central bank. UBS' Gardner was very clear about what this meant last week. UBS expects interest income to  decline by 100 million francs this year compared with 2016 and will use all measures available to recover the shortfall through higher prices.