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News Europe’s banks may

Europe’s banks may be at risk of failing if negative rates continue: EIU (Economist Intelligence Unit)

26 Sep 2019

Important points:

● Large banking institutions face the risk of failure if interest rates in Europe continue to stay negative, said Simon Baptist, an economist of the Economist Intelligence Unit during an interview with CNBC

● The ECB cut its main deposit rate by 10 basis points to the all-time low -0.5%

● European banks have struggled for years in a persistently low interest rate environment. Rates in the Euro zone first hit zero in 2012 and turned negative in 2014. Low interest rates hurt lenders’ profits as they narrow the margin that banks can earn

● Baptist stated that if interest rates stay below zero, they’re not all going to be able to be profitable, running as they are today, in 10 years’ time

● “There’s either going to have to be consolidation… maybe some bank failures, or some really radical changes in business models,” he said

● European Central Bank lowered the interest rate that lenders receive for depositing money with the central bank, pushing it further below zero, resulting to the central bank raising the amount it charges lenders for the excess cash they hold on to overnight

● To relieve pressure from the lenders’ margins, the central bank also announced a two-tier rate system which exempts a portion of the bank deposits from those charges

● European Central Bank President, Mario Draghi, said that under this arrangement, “part of banks’ holdings of excess liquidity will be exempt from the negative deposit facility rate.” This in an attempt to help, but it’s not the solution.

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