19 September 2019

Financial Times: Eurozone banks need to be part of the solution

Mario Draghi’s swansong decision last week to revive the European Central Bank’s quantitative easing programme and cut the interest paid to negative 0.5 per cent had been widely feared by the eurozone’s beleaguered banks.

No wonder. Lenders currently hold about €2tn of deposits at the ECB — and every 0.1 per cent move further into negative territory wipes €2bn off their income. The 6.1 per cent return on equity of the eurozone banks last year (less than half the tally of US rivals) masks particular weakness in the region’s largest economy, Germany, where banks made just 2.4 per cent. Only Greece was weaker.

There was a sop in Mr Draghi’s announcement. Emulating other countries with negative rates, the ECB is to exempt a tier of deposits — six times more than those held for reserve requirements. They will earn zero instead. Previously only the reserves escaped the negative rate.

Bankers dispute how much benefit this “tiering” will bring. In Deutsche’s case an estimated one-third of its €100bn deposits will qualify for the zero per cent dispensation. The rest are subjected to the more penal negative rate — and now with an open-ended timeframe. The ECB previously projected that rates would turn positive in 2022. Morgan Stanley estimates a boost to average eurozone bank earnings of 2 per cent — hardly enough to revive fortunes. A targeted pile of new cheap ECB funding for lending, the so-called TLTRO3 programme, is helpful. But it does little for banks in big economies with plentiful funding.

Understandably, banks are clamouring for more mitigation. Raising the six-times multiple of reserves that are accorded relief from negative rates is one idea. Switzerland has just raised its exemption from 20 to 25 times. In Japan, 95 per cent of central bank deposits are shielded. Banks are also lobbying to reduce the equity capital they must attribute to certain kinds of loans, particularly those granted to small and medium-sized businesses.

This is partly about self-interest, which the ECB should not indulge. It must weigh issues of safety and soundness: capital requirements are risk-based for a reason. But there is a genuine question of balance here. If the ECB is serious about stimulating the economy — the very reason it relaunched QE — then accompanying that policy with measures to get the banks working as part of the stimulus effort is logical. For too long the eurozone’s banks have been part of the problem, rather than part of the solution.

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