Negative Rates to Cut European Bank Profits, Morgan Stanley Says

  • Analysts see best outcome of ECB meeting next month as no cut
  • Deposit charges run counter to ECB goals, Morgan Stanley says

The European Central Bank would reduce euro-area bank earnings by as much as 10 percent by pushing deposit rates further into negative territory while having little effect on the euro, according to Morgan Stanley.

The “weaker” state of lending in the euro area would make it tougher for banks to charge more for credit, given analysts at the U.S. bank wrote in an e-mailed report from London on Wednesday. Beyond a 10 to 20 basis-point rate cut, “impacts on earnings would be exponential,” they wrote. A basis point is 0.01 percentage points.

ECB President Mario Draghi has sought to stoke inflation with cheap loans to banks, bond purchases and by charging lenders to deposit funds at the central bank overnight, a measure he could expand next month. While banks may gain from economic growth, record-low interest rates have squeezed their lending profit as the cost of complying with regulation and paying for past misconduct mounts.

For banks,“the best scenario would be no cut in the deposit rate and some expansion of ECB buying programs,” the analysts wrote. Should the ECB cut the deposit rate further, it may exempt smaller consumer lenders given the “stresses created,” they said.

The effects of negative rates run contrary to the ECB’s goal of easing credit conditions because they give banks an incentive to shrink, shy away from cross-border lending in the euro area and “risk non-linear effects” on funding, according to Morgan Stanley.

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