British banks are scrambling to prepare for negative interest rates, with senior leaders warning it could take up to 18 months to ready systems.
Executives at British banks have told MPs they are not yet ready for negative rates despite the Bank of England suggesting it could deploy them as early as next year.
“We have a programme underway to get ourselves ready,” Amanda Murphy, head of commercial banking UK at HSBC (HSBA.L), told MPs on the Treasury Select Committee this week. “We are not ready today.”
“We have some legacy systems that were never built for negative interest rate,” said Susan Allen, chief executive of retail and business banking at Santander UK (SAN.MC).
Allen said work to prepare the bank’s systems could take as long as 18 months. Others in the industry said testing was likely to take at least a year.
“If the MPC [the Bank of England’s Monetary Policy Committee] heaven forbid met and said they were going to drop rates to a negative number, then — as far as I’m aware — banks would not be able to implement that policy immediately,” Mark Mullen, chief executive and founder of Atom Bank, told Yahoo Finance UK.
The lack of preparedness is likely to trigger alarm bells among policymakers and central bankers. The Bank of England hopes to be able to deploy negative interest rates by early next year if needed.
The UK’s interest rate fell to a record low of 0.1% in March, giving rate setters little room to manoeuvre. The Bank of England began exploring the possibility of negative rates over summer and wrote to banks in October telling them to prepare. Many economists believe the central bank could look to introduce negative rates to counter any negative effects from Brexit, suggesting they could be just weeks away.
WATCH: What are negative interest rates?
Mullen, who formerly ran HSBC-owned First Direct bank, said banks would need a grace period to adapt if rates did go negative in the near futures.
“I still think there’s an implementation period if you move to that position,” he said.
Negative rates poses challenges for commercial banks on both a technical and operational level.
On a technical level, banks have to make sure their computer systems can handle inputs of zero or below. While this might sound relatively minor, the size and complexity of major banks’ computer systems means even small changes can be time consuming and costly. Murphy told MPs there was “considerable cost” associated with HSBC’s negative interest rate work.
“They’re not, you know, gosh, rocket science changes but they’re not trivial either,” said Mullen.
Newer challenger banks — like Atom, which began operations in 2016 — don’t face problems on the same scale as an HSBC or Santander, in part because of their newer systems and in part because they lack a large back book of existing business. Mullen said Atom had already completed a process to prepare for negative rates.
But executives at Britain’s biggest banks will surly face sleepless nights worrying about whether negative numbers could crash systems.
“I was on a Y2K project,” said Mullen. “The reason that Y2K wasn’t a catastrophe was at least in part because there was about a year and a half, two years of testing just to satisfy yourself that all the glitches in the system wouldn’t trip you up. A lot of it is to do with testing — in principle they all work, in practice you’ve got to be a little bit careful.”
Aside from technical challenges, negative interest rates also pose operational questions.
READ MORE: Fears grow for the end of free UK banking
“There’s a lot of policy decisions that people have to make,” Mullen said. “They actually have to decide if they’re going to start charging for services that hitherto people have been accustomed to receiving for free. That’s a seriously non-trivial implementation.”
The most obvious impact would be on current accounts and savings, where banks will be forced to decide whether to pass on the cost of negative rates. Last month, HSBC suggested it could start charging for products and services if low interest rates persist. The message sparked fears about the end of free current account banking in the UK, which has been the norm since the mid-1980s.
Paul Thwaite, chief executive of NatWest’s (NWG.L) commercial bank, said negative rates would have an impact beyond just savings and current accounts.
“It’s often interpreted purely as a deposit issue,” Thwaite told the Treasury Select Committee. “It’s also a lending issue depending on the legal contracts that you have in place.”
Howard Davies, chair of NatWest, said in October banks would face “many contractual issues” if negative interest rates were introduced.
Executives are scrambling to map and address all these issues. For now, they hope negative rates remain “in the box of tools,” as Bank of England governor Andrew Bailey put it earlier this year.
Most in the industry have reservations about negative rates. HSBC’s Murphy pointed out to MPs that rates below zero had failed to meaningfully spur growth in places such as Europe or Japan. The policy also risks warping the banking system in unusual ways.
READ MORE: Bank bosses deny overdraft 'cartel'
“We may see some very peculiar or unwanted behaviours such as people hoarding cash,” Murphy told MPs. “There are a number of potential consequences here that we should be aware of.”
Beyond questions about efficacy and the effect on the banking system, Mullen said negative rates would likely cause major headaches for customers.
“The first thing they’re going to say is: what does it mean for me? Are they going to be deducting money from my savings? Am I going to be charged a fee? What happens to my mortgage interest — does it go up, does it go down?” he said. “Those are not straight forward questions for people to have answered.”
WATCH: 10 ways to Brexit proof your finances