Senior European bankers voice concerns over ECB cut
Some of Europe’s most senior bankers have warned the European Central Bank of the dangers of negative interest rates ahead of a widely anticipated cut at the bank’s policy meeting on Thursday.
The ECB is expected to cut its deposit rate by 10 basis points to minus 0.4 per cent as it takes further action in its struggles to lift persistently low inflation and boost economic growth back to normal levels.
Bank leaders are alarmed by the crippling effect on their profits of negative rates which they cannot pass on to ordinary customers, adding to concerns about the fragility of financial stability in some parts of the eurozone.
But any attempt by the ECB to shield lenders from the effects of negative rates could weaken the policy and open the central bank to claims that it is engaged in a beggar-thy-neighbour devaluation.
Andreas Treichl, chief executive of Austria’s Erste Bank, told the Financial Times that another cut could encourage financial bubbles, hurt economic growth and create “social disparity” by penalising savers.
José García Cantera, Santander’s chief financial officer, added that the banks that would take the biggest hit to their profits if rates were cut again were those least able to bear it.
Last week, Sergio Ermotti, UBS chief executive, warned that excessively low rates were prompting banks to extend too many risky loans because they “don’t know what to do” with deposits.
The industry hopes to lay out concrete evidence of the detrimental impact negative rates are already having in mid-April, when the European Banking Federation will present the results of a review into how its members are being affected.
For now, bankers are speaking publicly on the dangers in the hopes that ECB policymakers will heed their warnings as they consider cutting deposit rates at Thursday’s meeting. Deposit rates at minus 0.4 per cent would be higher than Switzerland’s minus 0.75 per cent, but a historic low for the eurozone.
The ECB is considering ways to insulate banks from some of the impact of negative rates. Vitor Constâncio, ECB vice-president, hinted last month that it could follow the Bank of Japan and introduce a tiered rate system to exclude some bank deposits. However, that would blunt the effectiveness of the negative rates policy and other policymakers have said it is not the central bank’s job to protect lenders’ profitability.
Erste’s Mr Treichl, the longest-serving chief executive of a major European bank, said the ECB’s “limits have been reached” after years of ultra-loose monetary policy that has failed to lift inflation to anywhere near the ECB’s target of “close to but below” 2 per cent.
“What is being overlooked is that in a very substantial part of Europe and particularly in our region, savers are risk adverse and capital markets are not very prominent, [which means that] lowering interest rates is not very helpful in stimulating economic growth,” he said.
He believes lower interest income at a time when wage growth is also very modest would hit consumer spending. “It [monetary policy loosening] doesn’t push people into consumption. On the contrary, it pushes people to keep cash at home or at extremely low interest rates.”
UBS’s Mr Ermotti told Bloomberg TV that banks’ own need to generate income in a low rates environment risked creating tensions in mortgage lending and other real estate loans because banks are lending more there as they seek yield.
The hunt for yield is intense in a low rates environment — Morgan Stanley analysts predict that the 10-basis-point cut expected from the ECB on Thursday would knock 5 per cent off eurozone bank earnings next year.
Huw van Steenis, an analyst at Morgan Stanley, said negative rates were a “dangerous experiment” for banks, because they erode the sector’s profits, incentivise lenders to shrink, put a damper on cross-border eurozone lending and could disrupt bank funding.
Santander’s Mr García Cantera added: “The hardest hit banks will be those that earn a high proportion of their revenue from net interest rather than fees, as well as those with a high cost-income ratio and those with poor asset quality.”
Morgan Stanley estimated that banks on the periphery of Europe would be most sensitive, including Italy’s Banca Monte dei Paschi di Siena and Spain’s Banco Popular. It said Germany’s Commerzbank and France’s Crédit Agricole would also be exposed.
Santander, for its part, managed to increase its net income margin last year even as interest rates fell — Mr García Cantera said his bank had “several levers we can pull to offset the impact”, including raising the cost of corporate loans and mortgages.
Helge Pedersen, Nordea’s chief economist who is leading the EBF’s research project on the impact of negative rates, said banks in Denmark coped with negative rates by charging corporate clients, but not households, for deposits.
Danish rates first turned negative in 2012 but the situation is not as severe for the country’s banks compared with those in the eurozone. That is because Denmark’s central bank has a two-tier system that allows them to keep a fixed amount of central bank deposits in a 0 per cent current account and the rest in the negative interest account. The ECB has been considering similar moves.
Even with that concession, Mr Pedersen said there has been a “quite significant cost”, especially as loan creation has been low. Mr Pedersen said negative interest rates could, ironically, hinder credit creation because banks could increase lending rates to compensate for the money they are losing on deposits.
“That’s one of the big risks,” he said. “If the response from banks is to increase the lending rates then you will not see any kind of increase in lending activity. It [cutting central bank rates] might end up having the opposite consequence [to what was intended].”
