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.