Irrevocable Payment Commitments
BRUSSELS, 11 December 2020 – ESBG recently called on EU authorities to leverage the flexibility inscribed in the current regulatory framework by increasing the share of irrevocable payment commitments (IPC) to 30% of SRF ex-ante contributions for 2021.
Outlined in a letter sent on 24 November to the Single Resolution Board (SRB) and to the European Commission, ESBG noted that while the IPC is set now at 15%, increasing the share of the commitments would provide some flexibility to banks and would allow them to further support the economy in the Covid-19 outbreak context.
ESBG also noted that it is also essential that IPC amounts remain non-deductible from CET1 to allow this measure to be fully effective and in line with level 1 texts.
IPC are defined as an obligation on the part of credit institutions to pay their contributions in the future through a contract signed between the financial arrangement and an institution that opts for the IPC. This is a perpetual and irrevocable obligation secured by low-risks asset as collateral, such as cash, which should be unencumbered and earmarked for exclusive use by the receiving authority.
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Monetary Policy
Depositors are being hurt by low and negative interest rates. ESBG position on ECB accomodative monetary policy
Accomodative monetary policy creates disincentive to save, undermining savings and lending to the real economy – SMEs and households.The European Central Bank's insistence to keep interest rates low or even negative will continue to plague customers of Europe's 1000 savings and retail banks.
Savers hit hard, SME lending suffers
As savings and retail banking is anchored by the process of converting deposits into loans that finance the real economy, a low-interest policy generates a disincentive to save, undermining what we are in business to do: convert deposits into real-economy loans, which includes SMEs. A primary source of funding, deposits reveived by customers by ESBG member banks are transformed into more than €500 billion in SMEs loans. Troubling too are reports from ESBG members indicating that low and negative rates have led to some ‘chilling effect’ taking hold as clients shy away from borrowing to start a business or expand.
The European Central Bank’s highly accommodative policy stance is an untimely blow due to the increasingly razor-thin interest rate margins that result. ESBG also sees the challenge of negative rates, especially acute in EU countries that forbid financial institutions to pass on negative rates on retail depositors, fearing it could trigger deposits drifting out of accounts by clients. That restriction, within the current interest rate environment, leaves banks in a highly uncomfortable situation vis-à-vis both markets and customers.
Risky business on investment, inflation fronts
On the investment front, low and negative rates also pose a potential adverse effect on long-term savings, such as pensions, with current pension gaps only being bridged with the help of savings. More menacing is the prospect of depositors seeking to shift deposits to higher-yield, more often than not to higher-risk instruments, thereby undermining stability in the overall financial system in the longer term. Long-term accommodative policy could also fuel an unforeseen inflationary threat, a potential blow to household budgets and standard of living level.
