Banks faced with excess savings

The Covid-19 pandemic has encouraged bank customers to save more, resulting in a surplus of savings that is costing financial institutions dearly. While banks in France are managing to cope, several European and American banking groups have begun to tax or even refuse deposits.

Surplus reserves

In the current context of negative interest rates, surplus savings come at a cost for banks. Every bank is obliged to hold compulsory reserves: these consist of a portion of their customers' deposits, which they are obliged to keep and cannot put back into circulation in the form of loans.

These required reserves are deposited by banks in their account with their central bank. If they deposit more than the amounts required by the central bank, a deposit rate is applied to these so-called excess reserves.

The deposit rate in the eurozone has been negative since 2014, and has stabilized at -0.5% since 2019. The European Central Bank is therefore itself taxing the surplus savings of financial institutions, to encourage them not to let the money lie idle and to reinject it into the economy by granting loans.

It is the taxation of these excess reserves that is now prompting major US banks and European banking groups to tax their customers' deposits in turn, or even refuse to accept them.

Taxed or refused deposits

Germany's Commerzbank banking group and Hamburger Sparkasse, the country's No. 1 public savings bank, have announced that all deposits over €50,000 will now be taxed at 5%.

In Denmark, Danske Bank, the country's leading bank, was already taxing its wealthiest customers. For several months now, it has been gradually lowering the thresholds: on January 1, 2021, it reduced the ceiling to 250,000 kroner, and from July 1, all deposits over 100,000 kroner will be taxed at 0.6% to 1%.

The three biggest banks in the USA - Citigroup, JP Morgan and Bank of America - have asked their customers with the largest assets not to make new deposits, and are referring them to money market funds.

Deposits at these 3 banks had risen by $92 billion in 2019, then reached $1,000 billion in 2020. They rose by a further $243 billion in the first quarter of 2021.

In France, deposits rose by 14% in the Société Générale group and 23% in the BPCE group during the 1st quarter. At present, however, neither the Governor of the Banque de France nor French banks are considering taxing deposits.

French banks are less affected by the cost of surplus savings, as they benefit from two mechanisms:

  1. TLTROs, or longer-term refinancing operations, which allow banks to borrow at negative rates in order to grant loans to SMEs.
  2. tiering, which reduces the impact of negative interest rates. The European Central Bank will be introducing this last mechanism at the end of 2019.