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ESBG Board: Retail depositors being hurt by low, negative interest rates

​BRUSSELS, 8 June 2016 – Low and negative interest rates are gnawing away savings of households, who deserve to be spared from further trouble ahead, the ESBG Board of Directors recently concluded at their twice-yearly meeting in Antwerp.

The 18-member leadership body, which guides an association representing 1000 EU-based savings and retail banks, warns that financial asset values being chipped away are mostly held by private households and SMEs in the form of bank deposits and government securities. Designed to stimulate demand and encourage lending, low and negative rates imposed on depositors could lead to lower deposit levels – a core source of funding by many members – by swaying people to save less.

ESBG Managing Director Chris De Noose said: “The savings and retail banking model 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. Driving deposits away from banks into the mattress has adverse consequences for the economy and society as a whole.

On the investment side, 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 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.

Locally minded ESBG member banks, whose 60,000 branches serve up a third of the retail banking market in Europe, are especially facing the savings conundrum. Negative interest rates represent a serious threat to their locally driven business model due to increasingly razor-thin interest rate margins. Seeking deposits as a primary source of funding, banks also see ultralow and negative rates putting further pressure on already trim operating costs.

The challenge of negative rates is 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.

De Noose concluded: “Banks and savers remain on the front line.  We face a situation that negative interest rates could force customers pay a price for their thrift. This is having a ‘chilling effect’ on people and hurting our model that lends more than €500 billion to SMEs – the backbone of a struggling EU economy.”   


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