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Saturday, August 27, 2011

UBS Weighs Fee on Franc Deposits -

UBS Weighs Fee on Franc Deposits

ZURICH—In a sign of mounting tension caused by the strong Swiss franc, UBS AG said it may begin levying a temporary charge on Swiss franc deposits as a way of encouraging other banks to limit the cash they keep in the surging currency.

On Friday, UBS notified other lenders that bank with the Swiss group that, in light of strong inflows of cash deposits held in Swiss francs, it "might have to take corrective action, within the next few days, by means of a temporary excess balance fee." UBS declined to comment further on the notice.


UBS's move echoes a recent move by Bank of New York Mellon, which said it would charge large corporate and investor clients for deposits.

The potential move comes as Swiss National Bank has been battling to rein in the franc, which has surged against the dollar and the euro in recent weeks. Earlier this month, it trimmed its key three-month London interbank offered rate target to close to zero in an effort to stem investor demand for the franc. It has also increased banks' most readily available deposits—a type of overdraft available to retail banks that want it—to 200 billion francs in recent weeks from 80 billion francs.

The resulting swelling of liquidity has effectively sent short-term interest rates into negative territory in the interbank market. For banks, this means holding Swiss franc cash deposits for other banks isn't worth their while.

UBS has in turn been flooded with Swiss-franc deposits from other banks that yield close to zero. When the cost of managing these accounts is taken into consideration, these deposits could be loss-making for UBS.

"It means that they are also quite nervous about these negative rates," said Ursina Kubli, foreign exchange strategist with Bank Sarasin.

Credit Suisse Group and Julius Baer Group declined to comment as to whether they would follow UBS's warning. However, a person familiar with the situation says Swiss banks have been warning their clients that they are reluctant to take on additional large Swiss franc deposits. Swiss banks, including UBS and Credit Suisse, have said that rock-bottom interest rates have weighed heavily on their profits in recent quarters.

UBS's move echoes a recent move by Bank of New York Mellon Corp., which said it would charge large corporate and investor clients for deposits. Turmoil in the financial markets has driven investors and corporations to hoard cash with banks that have custodial operations, rather than investing the money in even relatively safe securities. As a result, BNY Mellon was flooded with cash that it was struggling to reinvest, particularly in an environment of ultra-low interest rates. Moreover, institutions such as BNY Mellon pay fees to regulators to insure their deposits.

However, while BNY Mellon's decision reflected broader strains in the U.S. economy, UBS's warning is a side effect of investors' view of Switzerland and the Swiss franc as a haven in a time of turmoil.

In the 1970s, the SNB required Swiss banks to charge a penalty on franc deposits by nonresidents, in an effort to control a similar surge in the Swiss currency. Those penalties were held in place for much of the decade, but did little to stem the rise of the currency by the time the bank abandoned it.

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