Computer says no: Ulster Bank’s IT system refuses to input negative rates

As euro zone lenders scramble to pass on negative interest rates to customers, one bank in Ireland has encountered an unexpected problem: its computer says "no".

Ulster Bank's ageing systems make it impossible for the lender to routinely charge large corporate customers in the Republic for deposits that run into millions of euros, according to two people briefed on the issue.

The IT glitch means Ulster Bank, which is owned by Royal Bank of Scotland, must itself absorb the cost of negative interest rates on reserves it has parked at the European Central Bank.

“You don’t set up an IT system to charge your customers for deposits,” said one of the people. “You wouldn’t believe how hard it is to change.”

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The Irish lender's computer systems were built at a time when it was "unthinkable" that a bank would charge a customer for holding a deposit, according to one IT consultant, who requested anonymity because their company has advised RBS in the past.

It is the latest IT setback for state-backed RBS, which has been hit by a litany of problems in recent years. The bank holds the record for the largest UK fine for an IT outage, after it was charged £56 million over a 2012 issue that caused several weeks of disruption.

Ulster Bank's difficulty underscores how banks in Europe are struggling to deal with a protracted period of negative rates that is denting their profitability.

This month, the ECB cut its key deposit rate by 10 basis points to minus 0.5 per cent, causing consternation in the banking industry and sowing division on the central bank’s executive board. Markets are forecasting a further reduction next year.

Negative rates were first introduced by the ECB in 2014 in an attempt to boost the stuttering euro zone economy by nudging banks into lending more money rather than leaving liquidity languishing at the central bank.

But the knock-on effect has been to crimp profitability in a banking industry that is already struggling to generate acceptable returns, prompting many lenders to offset the cost of negative rates by levying a charge on corporate customers and, in some cases, wealthy clients.

Ulster Bank has implemented a manual workaround that allows it to levy an ad hoc charge on a small number of the largest depositors but its IT systems are unable to apply negative rates automatically, one of the people said. The bank is working on a technical fix for the problem, they added.

Ulster Bank said: “We already charge large corporates for certain deposits.”

One of the people said the impact had been exacerbated by the fact that Ulster Bank's larger competitors - Bank of Ireland and Allied Irish Bank - have started routinely passing negative rates on to large corporate customers.

The person added that some corporations had recently moved their balances from the bigger Irish lenders to Ulster Bank to avoid paying the negative rates, leading to an increase in the size of the lender’s deposit base.

Ulster Bank had customer deposits of €21.3 billion at the end of the first half of this year, according to the lender’s most recent balance sheet, an increase of €1.8 billion or 9.2 per cent compared with the same time a year earlier. - Financial Times