April 10, 2019 / 3:13 PM / 5 months ago

Breakingviews - ECB sop to banks will only help at the margin

Mario Draghi, President of the European Central Bank (ECB), addresses the media during his monthly news conference at the ECB headquarters in Frankfurt, July 5, 2012. The European Central Bank cut interest rates by 25 basis points to 0.75 percent. REUTERS/Alex Domanski

LONDON (Reuters Breakingviews) - European Central Bank President Mario Draghi is considering ways to ease the financial pain that negative interest rates impose on banks. However, such measures would at best only modestly boost lenders’ profits and do nothing to remedy their bigger challenge: high costs.

It’s true that the ECB’s deposit rate, currently minus 0.4 percent, is part of the problem. Lenders pay some 8 billion euros annually to the central bank on 2 trillion euros of excess deposits, Deutsche Bank analysts estimate. A tiered system, such as the one adopted by Japan, could soften the blow. Bank of Japan chief Haruhiko Kuroda splits lenders’ balances into three tiers of which only one – the so-called policy-rate balance – pays minus 0.1 percent. The charge applies to around 5 percent of Japanese banks’ deposits; in the 2017-18 fiscal year they paid the equivalent of just 0.006 percent of their total deposits.

Savings-rich German banks would probably benefit the most if the ECB adopted a similar approach. At Commerzbank, for example, halving the drag from negative interest rates could add about 87 million euros to pre-tax profit, according to Breakingviews calculations, equivalent to 7 percent of the group total last year. That would be helpful, though hardly a game changer.

Besides, Sweden shows negative rates can coexist with profitable financial institutions. In 2018 the country’s banks paid the equivalent of 0.5 percent of their deposits to the central bank, whose deposit rate is minus 1 percent. Yet the average return on equity for big Swedish lenders is over 12 percent, according to the Riksbank, the central bank. EU lenders’ return on equity averaged just 6.9 percent in 2018 according to data from the European Banking Authority.

The discrepancy is largely due to high costs rather than low rates. Expenses eat up 65 percent of EU banks’ revenue, on average; the ratio for Swedish lenders is 18 percentage points lower. Draghi on Wednesday implied that banks with high cost-to-income ratios should look at their business models rather than complain about negative rates.

Slowing growth means ECB rates are likely to stay lower for longer than previously anticipated and may be cut further during the next economic downturn. Introducing a tiered deposit system might soften the blow for EU lenders. But until they cut overheads more effectively any ECB help will be marginal.


Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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