A former Sovereign Bank branch is rebranded as Santander's first retail bank branch in the United States in New York, U.S., on Thursday, Oct. 17, 2013. Photographer: Ron Antonelli/Bloomberg *** Local Caption ***
© Bloomberg

The clue was always in the name. The 123 current account, launched by Santander UK four years ago, has paid customers 1 per cent on deposits of more than £1,000, 2 per cent on £2,000+ and 3 per cent on £3,000+.

No longer. Last week Britain’s fifth biggest bank dropped the decent rates, in a small but potent sign of how the world’s vast macroeconomic experiment with ultra-low and negative interest rates is panning out in the real world.

The 123’s rates and whizz-bang fringe benefits had made it as close to revolutionary as high-street banking gets. Santander had been rewarded with a glut of new business — by mid-2016 it had attracted more than £60bn of deposits. So successful was the 123 as a customer acquisition tool that it was exported to Santander’s home market of Spain and to Mexico, too.

There had long been a snag, though. In an environment in which banks’ interest margins are squeezed, the 123 account is reckoned to be horribly lossmaking (the bank does not disclose details). The August cut in UK base rates to 0.25 per cent was seemingly the final straw. Santander said the account’s generous tiered rates would be replaced by a flat 1.5 per cent. Perhaps British Olympian Jessica Ennis-Hill, who fronted an advertising campaign for the product, will soon be trumpeting the benefits of “the 1.5 account”.

Other UK banks have gone further. On Monday, Royal Bank of Scotland imposed negative rates on some corporate customers.

At the same time, consumer champions have protested that lenders including Lloyds Banking Group and Nationwide have either raised mortgage rates despite the UK base rate cut, or have failed to pass on the full benefit.

Banks are once again villains — only now they are not earning the 20 per cent returns on equity they enjoyed before the financial crisis. The typical western lender is struggling to make 5 to 10 per cent.

The squeeze on banks is tightest in eurozone markets where there is a reliance on the basics of deposit-taking and lending. This is the case in Italy, for example, where dozens of small banks as well as the likes of Monte dei Paschi, the number three lender, are struggling to survive. The root cause is a glut of bad loans, but an inability to rebuild profitability through interest margins is compounding the problem.

A less visible, but no less systemic, threat exists in Germany. Deutsche Bank clearly has high-profile problems of its own, stemming from past malpractice and bad business. But the country’s welter of Sparkassen, the no-frills, locally focused savings banks that quietly fund Germany’s small businesses, are acutely exposed to the margin erosion that has come with the European Central Bank’s negative interest rates. One top banker describes the phenomenon as a “slow-burn systemic crisis in European banking”.

Relatively upbeat results from last month’s European bank stress tests failed to foster investor confidence. Crucially, they did not model for more extreme negative rates.

Passing on those rates is becoming more common. For several years, a few banks — including several Swiss institutions and HSBC — have imposed negative rates on some big corporate customers. Retail customers are now being affected too. Most recently the tiny Raiffeisenbank Gmund am Tegernsee in southern Germany said it would charge negative rates on deposits of more than €100,000.

Banks in some countries are being more creative. In Spain they are encouraging customers to shift from tracker mortgages to fixed-rate deals, fearful that further falls in underlying rates could mean banks have to pay mortgage borrowers to lend them money.

In France, de facto negative rates have been introduced via the imposition of account charges. That should be structurally better for the banks because they can be maintained once interest rates rise again.

So far in the UK, account charges remain taboo for standard accounts. Santander charges £5 a month for the 123 account, up from £2. But banks have not followed suit on standard accounts, despite political and regulatory criticism that “free” accounts hide the real cost of charges and have encouraged the systemic mis-selling of products such as payment protection insurance.

The big banks would love to charge but each fears a “first mover’s disadvantage”. If they change their mind, it would be unpopular. It would also be a powerful proxy for how worried we should all be about the mass distortions of ultra-low rates.

patrick.jenkins@ft.com

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