The ECB first cut its deposit rate to negative territory in June 2014, to -0.1%, and reduced it again late that year, to -0.2%, with a third cut taking it to -0.3% in December 2015. A further reduction was announced last month, to -0.4%, and since then criticism of the move has intensified, most notably of late from the German Finance Minister, concerned at the low return for savers. Low and negative bond yields are putting pressure on insurance companies with products offering a guaranteed return and the ECB’s deposit rate is particularly irksome for the hundreds of small savings banks across the Federal Republic, given that retail deposit rates cannot fall below zero.
That squeeze on margins is not an exclusive German phenomenon, of course, and any banking system with a high dependency on retail deposits will be affected. Ironically, perhaps, banks in general have been urged to reduce their dependence on the wholesale markets , and new Basel III rules on liquidity and funding also push banks towards deposits.
The ECB has recently responded to the criticism by arguing that any squeeze on net interest margin can be more than offset by higher loan growth, which the policy is designed to stimulate, and the capital gains resulting from the fall in bond yields. In that context the results of the latest ECB Bank Lending Survey (BLS) for April is instructive, as it includes a number of ad hoc questions regarding the impact of non-standard monetary policy, including the effect of the negative deposit rate. Not one bank felt the deposit rate had a positive impact on their net interest income, with 63% stating a negative impact and another 18% a very negative effect, giving a net negative figure of 81%. Asked about the next six months, the net negative figure climbed to 85%. The vast majority of banks had seen no impact on loan volumes, although there was a small net positive, but this was offset by the negative impact on margins, so reducing overall income.
The survey also asked respondents about the impact of the ECB’s asset purchase programme, and again the results are unlikely to raise too much cheer in Frankfurt. A small net number of banks (4%) had sold sovereign bonds as a result of QE and those experiencing capital gains in general on assets for sales was a net positive 12% but that benefit was also more than offset by the net interest margin impact, with a net 27% seeing a fall in NIM. The result was that only 9% of banks had seen profitability rise as a result of QE, with 28% experiencing a profit fall, leaving a net decline percentage of 19%.
On the positive side QE was seen to have improved the liquidity position of banks and access to financing, notably via covered bonds, and the ECB has of late highlighted these metrics as a sign that non-standard measures are working. Credit to the private sector is also finally growing again, albeit by an annual 0.9% , but for the moment at least the evidence supports the view that negative rates, in particular, are having a detrimental effect on bank profits. It remains to be seen how that will change when the ECB’s long term loan scheme comes on stream.