ECB Defends Negative-Rate Push Against Criticism From Bankers

  • Subzero rates have led to lower loan impairments: Constancio
  • Long-term loans seen softening impact of negative rates

European Central Bank officials defended a decision to push interest rates further below zero against criticism from some of the region’s top bankers.

Banking executives have warned a deeper descent into negative territory threatened a key source of profit -- the gap between their cost of funding and revenue from lending. The ECB lowered its deposit rate by 10 basis points to minus 0.4 percent on Thursday, while also announcing expanded asset purchases and more multi-year loans to stimulate the economy.

ECB Vice President Vitor Constancio said at a press conference in Frankfurt that subzero rates -- in place in the euro area since mid-2014 -- have helped banks by lowering their funding costs, generating capital gains on bond holdings and reducing loan impairments. Lenders’ net interest margin widened on average in the euro region last year, while return on equity rose, Constancio said.

“The aggregate profitability of the banking system has not been hindered by the experience we had of negative rates,” ECB President Mario Draghi said at the press conference. “Does it mean that any negative rates will be posited? Does it mean we can go as negative as we want without having any consequence on the banking system? The answer is no.”

‘More Problematic’

By charging banks for idle cash kept at the central bank, the ECB intends to reduce market borrowing costs and encourage lending. The problem for banks is that they can’t easily pass the cost onto retail clients for fear that they’ll withdraw their savings, which are a crucial source of funding and make up the bulk of deposits. The further rates fall, the greater the squeeze.

“The world of negative rates is becoming more problematic,” Georg Fahrenschon, the president of the association of German savings banks, said in a statement on the group’s website. “All investors who are dependent on secure assets are pushed into a malfunction.”

The 30-member Euro Stoxx Banks Index initially surged 7.2 percent after the ECB’s announcement before ceding most of those gains and ending the day up 0.9 percent.

Draghi acknowledged that certain segments of the banking system get hurt more by negative rates, such as those forbidden from passing higher funding costs onto depositors and those with mortgages indexed to benchmark rates that have fallen so low that the loans are no longer profitable.

Goldman Sachs Group Inc. analysts, in a note to clients this week, forecast an earnings-per-share impact for the banks most reliant on deposits of as much as 10 percent for each 10 basis point reduction in the deposit rate. A basis point is a hundredth of a percentage point.

‘Cushioning’ Blow

The ECB’s new round of targeted refinancing operations will start in June. The central bank said the interest rate “can be as low as the interest rate on the deposit facility,” meaning the institution could end up paying banks to take loans from it.

While those loans “will help to cushion the blow from negative rates,” the absence of a tiered system for deposits at the ECB is “disappointing,” Nick Kounis, head of macro research at ABN Amro in Amsterdam, wrote in a note to clients.

“Loan growth is still too low,” Draghi said. The four-year credit “will offer attractive loan conditions to banks to stimulate credit creation. It also provides funding certainty. It’s a four-year operation at an attractive price in an environment of increasing volatility and large upcoming bank bond redemptions. Banks face sizable funding needs.”

More Pressure

The challenge of ever-lower rates comes as the region’s biggest banks are already overhauling their businesses and firing staff to lift profitability and meet tougher capital and regulatory requirements. More pressure on profits means more pruning is likely.

Deutsche Bank AG posted its first annual loss since 2008 last year after writing down the value of its securities unit and consumer-banking divisions. Commerzbank AG, Germany’s second-biggest bank, scrapped profitability targets for 2016, while Societe Generale SA of France indicated it may miss its goal for returns this year.

“We can cope with the current interest-rate environment or even a bit lower,” Gerrit Zalm, chief executive officer of ABN Amro, said in an interview in Shanghai last week. “But if we were really going into the very negative interest-rate environment, a lot of banks including us will have a difficult period.”

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