The effects of negative interest rates on customers of the financial services industry

Abstract

After the 2008 financial crisis, central banks decreased interest rates in an attempt to recover from the economic downturn. Notwithstanding the implementation of this expansionary monetary policy, borrowing and spending remained stagnant. This led central banks, such as the European Central Bank, to introduce an expansionary monetary policy called the Negative Interest Rate Policy (NIRP). With this policy, commercial banks are obliged to pay a percentage fee on all the excess reserve they hold with the central banks; thus, leading to a decline in interest rates on deposits. To date, in Malta, banks have elected to absorb most of the cost of the NIRP. Although banks are being charged on excess reserve they hold at the central bank, until now banks have opted not to reduce the interest rate to negative territory on the retail customers’ deposit accounts. Several studies have been conducted on the effects of changes in interest rates on banks’ performance. However, these studies did not conclude how negative interest rates affect the behaviour of customers in Malta. In fact, customers’ behaviour towards savings, consumption and investment when negative interest rates are implemented has not yet been tested on residents in Malta. In the financial world, customers are crucial, since changes in their behaviour on savings, consumption and investment substantially affect the liquidity and profitability of the banks. This study analyses the behaviour of local bank customers should local banks decide to pass the burden of negative interest rates to their customers. To determine whether negative interest rates would affect customers’ behaviour on savings, consumption and investment, the method considered the most appropriate for this study to collect data was the use of questionnaires, which were conducted in January 2021. The results of the study show that, when negative interest rates are implemented, the majority of the participants change their behaviour on savings, consumption and investment. The more negative the interest rate is, the less likely are respondents willing to keep their money in the bank. Furthermore, it was found that there were relationships between education, age and income and the customers’ behaviour towards savings, between age and the customers’ behaviour towards investment and between education and the customers’ behaviour towards consumption. The results suggest that the lower the interest rate on deposit accounts is, the more are customers likely to withdraw their money from their bank accounts.