Swiss banks paid nearly $1 billion in negative interest rate fees in 2017, a recent Reuters report notes, pointing to wealthy bank clients largely storing their cash on the sidelines and, thanks to negative interest rates, paying for the pleasure.  In fact, the cash levels rival that seen in the wake of the 2008 financial crisis. With the cost of holding cash been at historic high levels – typically banks paid interest on deposits, not charged it — why do interest rates remain negative in the wealthy region that abruptly left the Euro currency union in January 2015? One can thank the Swiss National Bank run by Thomas Jordan, but what is the reasoning there?

Thomas Jordan

Thomas Jordan Policy Forcing Wealthy Swiss bank depositors piling into cash

For the first six months of 2017, Swiss banks – and their wealthy depositors – paid nearly 970 million Swiss francs ($1 billion) in negative interest rate fees, according to central bank data. Thomas Jordan, head of the region’s central bank, is charging a 0.75% fee on deposits, a move that has not discouraged wealthy Swiss banking clients from plowing nearly one fifth of their investible assets into cash rather than potentially earning a return in the stock or bond markets.

Credit Suisse, the world’s fourth largest bank based on assets, said the three-month average for client cash holdings was near 30%. UBS, the world’s largest private bank, said its clients were in cash to the tune of 21% in the second quarter, the Reuters report noted, down a fraction from the previous quarter.

Julius Baer, Switzerland’s third-largest private bank, notes cash holdings near 22%, with Julius Baer Chief Financial Officer Dieter Enkelmann noting a comparable to the 2008 financial crisis.

Just prior to the crisis, cash holdings were near 16%, but after the global financial crisis shocked the world, cash levels climbed to 34%.

A policy divergence between the Swiss and ECB could be driving the short-term currency price divergence

Driving the negative interest rates could be the value of the Swiss currency.

SNB chief Thomas Jordan was recently quoted as saying the franc was “significantly overvalued,” sending the currency falling in value. A Morgan Stanley report out Friday claimed the franc “most overvalued currency in the G10 universe.”

Separately, Morgan Stanley analyst Hans Redeker pointed to the currency’s recent role as a “funding currency.”

“The CHF should turn into the ultimate funding currency as the SNB continues to expand its balance sheet while private entities look for yield outside Switzerland,” he wrote in a note titled “Don’t Miss the Swiss. “Positive risk sentiment and the CHF being the most expensive in the G10 helps this currency to weaken.”

The comments from the SNB regarding its currency value come as the European Central Bank has been reported to considering tapering its negative interest rate policy.

When the Swiss abruptly left the euro currency marriage in 2015, the rationale was not fully explained relative to the ECB’s interest rate policy and its treatment of sovereign debt in the region. This loose lending policy, particularly in over-leveraged countries in the periphery such as Greece, Spain, Italy, and Portugal, has resulted in a debtor relationship with strong economies such as Germany. While the indebted nations benefited from lower interest rates they could not otherwise obtain, Germany and other strong economic regions benefited from a combined lower currency rate that would not have been the case had they had they floated their own currency.

While the value of the Swiss frank is closely correlated to that of the euro currency, the two assets have been diverging in price recently, driven by different outlooks on interest rates. The Swiss look at low-interest rates from the standpoint of lowering their currency value at a time the ECB is eying normalization.

With all the above sais, could we be set for another Swiss black swan? Stay tuned for that answer from Thomas Jordan, maybe….