The largest Swiss banks, including Credit Suisse Group (CS - Free Report) and UBS AG (UBS - Free Report) , have decided to charge fees and pay negative interest rates on interbank Swiss franc deposits. This action is a part of these banks motive to discourage excess hoarding of the valued currency.
Credit Suisse is the first bank to have set negative interest rate on Swiss franc deposits for handling the rising demand for the currency. The bank will start implementing negative interest rate from December 10, 2012, though the rate was not disclosed. However, only inter bank deposits will be exposed to negative interest rates whereas individuals would be spared.
Similarly, UBS is of the idea that charging a fee on excess deposit balances would help it maintain account balances at desired levels.
Earlier in 2011, Swiss National Bank had reduced its interest rates near zero in order to control the value of Swiss franc. Later, it imposed a floor of 1.2 Swiss francs per euro to control the value appreciation of the Swiss franc, assisting the Swiss exporters to remain competitive.
Swiss banks are not the first to opt for negative interest rate policy. In October this year, State Street Corporation (STT - Free Report) and The Bank of New York Mellon Corporation (BK - Free Report) declared to charge depositors for holding Danish kroner and Swiss francs deposits. This move was a part of these banks’ strategy to re-establish a decent profit margin between what has been paid for deposits and what has been earned on investments.
Since the Euro Zone crisis is deepening, investors have started drifting to other safer currencies deserting the volatile Euro. European nations, such as Denmark and Switzerland, have slashed interest rates below zero levels to stop their currencies from rising. Therefore, currencies like the Swiss francs and Danish kroner offer less risk compared to Euro.
The application of negative interest rates will definitely discourage big institutional clientele from stashing more deposits into the banks, thereby increasing money supply in the economy. This will protect the Swiss economy from deflationary pressures.
Both Credit Suisse and UBS hold a Zacks #3 Rank, which translates into a short term Hold rating.