European bank chiefs have warned that a new wave of ultra-loose monetary policy could push some institutions into taking greater risks, as they seek to protect profit margins.
Speaking in the wake of the European Central Bank’s decision this month to push interest rates further into negative territory and to begin buying corporate bonds, the executives said that such moves might, as intended, push banks to lend more — but carried dangers of their own.
Gonzalo Cortázar, chief executive at Spain’s Caixabank, expressed concerns about a build-up of risk in the banking system as a whole. He also said some banks were taking up the ECB’s offer to pay them to borrow money in a new programme known as targeted longer-term operations — or TLTROs — and using the loans to buy riskier assets, such as high-yield corporate debt.
Many institutions are at present particularly focused on margins because negative interest rates can inflict a double blow on banks’ profitability. The ECB charges them interest on more than €700bn of excess deposits at the central bank. In addition, its expanded asset-purchase programme — now €80bn per month — is driving down the cost of borrowing for companies, meaning less income for banks.
Against such a backdrop, Ralph Hamers, chief executive of ING in the Netherlands, said ING was diversifying into higher-yielding assets, such as German consumer lending and international corporate lending.
By issuing more loans to consumers and overseas companies, which are considered more risky and therefore allow it to charge higher rates, ING aims to protect its profit margins.
Banks can pass some of this extra cost on to clients by charging them negative rates on deposits. Stephan Engels, chief financial officer of Commerzbank, said Commerzbank has been doing this on large deposits by companies since late last year. But he said it was hard for banks to start charging retail depositors, adding: “I still cannot imagine that.”
Another strategy by banks is to expand their fee-earning businesses, such as wealth management services, to offset a decline in interest income.
Federico Ghizzoni, chief executive of Italy’s UniCredit, said: “More than ever in this challenging environment . . . we are cross-selling other products to our clients that generate fees, such as wealth management and investment management.”
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