Senior
European bankers voice concerns over ECB cut
Laura
Noonan and Martin Arnold in London, and Ralph Atkins in Zurich
March 9, 2016 4:01
pm
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.
Negative rates are 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
- Huw van Steenis,
analyst, Morgan Stanley
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].”
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