BRUSSELS, 9 September 2016 – The ECB's insistence to keep interest rates low or even negative will continue to plague customers of Europe's 1000 savings and retail banks, ESBG reiterated yesterday after the European Central Bank announced to leave policy highly accommodative.
ESBG Managing Director Chris De Noose said: "With deposits a primary source of funding for ESBG member banks, negative interest rates pursued by the Eurozone central bank are 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.
Savers getting 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. ESBG members lend more than €500 billion to SMEs. 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.
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.
De Noose concluded: "There is so much downside in keeping ECB rate policy as it stands: Savers are getting hurt while inflation and excessive risk taking could cause trouble ahead. We're seeing lower deposit levels – a core source of funding by many members – by swaying people to save less. There is need for a policy shift that curtails this."