European banks are facing hard questions about how to deal with negative deposit rates, after the European Central Bank’s decision to lower its deposit rate to -0.5% last month. Signs appeared this week that they might decide to pass the rates through to individual customers.
The Italian bank UniCredit has made waves by beginning to charge rich customers for depositing their money. Although the charges only apply to customers with more than €1m in their accounts, this could be the start of major changes in the European banking market.
“The problem is linked to the big question for European banks, which is how to recover decent profitability,” Giovanni Sabatini, chairman of the executive committee of the European Banking Federation and director-general of the Italian Banking Association, told GlobalMarkets.
“If negative interest rates are a temporary solution to address a situation of crisis, we can withstand the consequences. If negative rates become the new normal and become a structural component of the financial market, this will make being a commercial European bank extremely difficult.”
The ECB has introduced measures to help ease some of the pain negative interest rates could bring for European banks. Most importantly, it has said it will not charge financial institutions for some of the excess liquidity they store in its accounts, as part of a two-tier system for reserve remuneration.
But the ECB has also signalled that it is more than willing to keep its interest rates at a very low level for a sustained period of time, as it waits for better growth and inflation in Europe.
“In the stronger economies, banks have been willing to charge their corporate depositors negative rates,” Philip Lane, an executive board member at the ECB, told an audience at the Brookings Institution in Washington this week. “If you look at the banks that have been brave enough to pass on negative rates, they have been fine. They have been able to grow loans, and they are not losing depositors in any significant way.”
This has become a keen point of debate in European finance. “I don’t agree with the idea that negative rates aren’t an issue. It is an issue,” said Michala Marcussen, chief economist at Société Générale, on a panel at the Institute of International Finance’s annual meetings.
“There are several factors that will impact banks. One is a very low, flat rate curve, with negative deposit rates with the ECB that cannot be passed on to retail savers. That is a major headwind.”