Policymakers are exploring ways to mitigate the adverse effects that negative interest rates can have on bank profitability, European Central Bank Executive Board member Benoit Coeure said Wednesday, as euro area rate-setters prepare to unveil fresh stimulus next week that may include a deposit rate cut.
Acknowledging the concern that negative deposit rate could squeeze banks’ net interest margins, Coeure said, “We are well aware of this issue.”
“We are monitoring it on a regular basis and we are studying carefully the schemes used in other jurisdictions to mitigate possible adverse consequences for the bank lending channel,” the policymaker said in a speech in Frankfurt.
He also pointed out that there was a need to qualify the narrative that banks’ challenges flow largely from our monetary policy.
The ECB’s rate-setting body, the Governing Council, is scheduled to hold its next policy session on March 10.
Coeure’s remarks may be one of the last guidance from ECB policymakers as their “quiet period” before next week’s policy meeting begins on Thursday.
ECB President Mario Draghi has said that the bank will not hesitate to act in March if downside risks to price stability prevail.
Markets and economists are looking forward to further reduction of at least 10 basis points in the deposit rate, which will push it deeper into negative territory.
Data released at the start of this showed that Eurozone consumer prices declined for the first time in five months in February and at the fastest pace in a year, adding to the deflation worries of the ECB.
Uncertainty in the financial sector threatens to block the path of recovery in the euro area and delay the process of lowering unemployment and boosting inflation, Coeure said.
“We face uncertainty about the outlook for the global economy. We face uncertainty about the direction of Europe and its resilience to new shocks – the UK referendum, the next wave of migration,” the policymaker said.
The single-currency bloc “urgently needs higher growth to bring down high unemployment, to deleverage the economy and to raise inflation back to our price stability objective. Uncertainty in the financial sector only blocks that path,” Coeure added.
Coeure also said that many banks have been able to withstand the adverse effects of negative interest rates with higher lending volumes, lower interest expenses, lower risk provisioning and capital gains.
Further, he said euro area banks’ aggregate net interest income increased last year, especially as crisis-hit banks refinanced expiring high-yield liabilities.
“Our commitment to our price stability mandate is vital to anchor expectations of nominal growth,” the policymaker said.
“Those who call for a less accommodative monetary policy have to ask themselves what would be the impact on banks’ lending volumes and loan-loss provisions if output were stagnant and prices falling.”
Coeure also pointed out that there were several other challenges that constrain banks that are not directly linked to actions by the ECB. These include legacy assets such as bad loans.
Some of the policy measures that can accelerate the writing off or disposal of bad loans are improving insolvency regimes and increasing the efficiency of judicial systems, he added.
The policymaker also noted that there was scope for banks with weak profitability to find ways to boost non-interest income and reduce operating costs.
The material has been provided by InstaForex Company – www.instaforex.com