Banks warned about 'lack of preparedness' for negative interest rates

author-avatar By on July 12, 2021
Banks warned about 'lack of preparedness' for negative interest rates

The Reserve Bank has maintained that negative interest rates are unlikely, but the prudential regulator has warned banks to be prepared for the event.

In a consultation with Authorised Deposit-taking Institutions (ADIs i.e. banks), Australian Prudential Regulation Authority's (APRA) banking division director Therese McCarthy Hockey told banks to be prepared should the 'unlikely' event happen.

"APRA expects ADIs to, at a minimum, develop tactical solutions to implement zero and negative market interest rates and cash rate by 30 April 2022," Ms McCarthy Hockey said. 

The Reserve Bank of Australia has maintained that a negative cash rate is highly unlikely in Australia.

"This, however, does not preclude the possibility of a negative cash rate in the future. Irrespective of the level of the cash rate, it is possible that other interest rates determined in the financial markets could fall to zero or below zero at any time," Ms McCarthy Hockey said.

Officially, the Reserve Bank's cash rate target was held at 0.10% earlier in this month, however extra factors like the RBA's bond purchasing program has pushed the interbank overnight cash rate near zero. 

Ms McCarthy Hockey pointed to some of the 'material risks' for banks with negative interest rates.

"APRA considers the risks arising from an ADI’s lack of preparedness for zero and negative interest rates to be material since this could have significant implications for an ADI’s risk management, hedging, operational processes, contracts, product disclosures, IT and accounting systems among other areas," she said.

"Insufficient preparation for the possibility of zero and negative interest rates could therefore have an adverse impact on an ADI, its customers and the markets in which it operates."

What would a negative interest rate actually look like for consumers?

Sweden's central bank 'Riksbank' was the first to use negative rates back in July 2009, cutting down to -0.25%.

This is a full 35 basis points lower than where the RBA's cash rate sits now. 

Since then, a number of European countries, as well as Japan, have flirted with negative interest rates from time to time.

However, a negative interest rate doesn't necessarily mean banks pay you to take out a home loan, although they would go close.

In practice, this can be seen in Denmark, where 'Nordea Bank Abp' was offering a zero-interest 20-year fixed home loan back in January.

'Jyske Bank' also once offered a 10-year fixed home loan at -0.50% back in 2019.

This effectively means the money owed every month falls by more than the repayment. 

Denmark's central bank's cash rate is now at 0.00%, however back in March 2020 it was as low as -0.60%. 

It's also likely that with a steep enough negative rate there would be fees on bank deposits.


Photo by Ussama Azam on Unsplash

Latest Articles

author-avatar
Harrison is Savings.com.au's Assistant Editor. Prior to joining Savings in January 2020, he worked for some of Australia's largest comparison sites and media organisations. With a keen interest in the economy, housing policy, and personal finance, Harrison is passionate about breaking down complex financial topics for the everyday consumer.

Collections:

Be Savings smart.
Subscribe for free money newsletters.

By subscribing you agree to the Savings Privacy Policy