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Last Thursday Mario Draghi disappointed markets with his careful decisions at the ECB meeting. Nevertheless, the European banks felt relief.
This relief can be explained that insignificant cut of deposit rate – by 0.1% to minus 0.3% – gives the banks opportunity to revise their strategies. It should be mentioned that negative deposit rate serves as a tax on excess reserves.
Negative deposit rate leads to reduction of net interest income. What does it mean? This means the difference between bank’s interest rates on own assets and rates in financing will be cut. At the given moment this tax is insignificant. According to statistics, the ECB keeps 577 million euro of deposit funds of the banks and only 71 million euro is an excess reserve.
These figures show that change in rate may raise annual spending by 71 million euro. However, specification of the spending over bank organisations is not equal. Some major banks have too much excess reserves on their balances, while Greek banks borrow funds to cover own financing.
Nevertheless, the banks with significant excess of reserves have concerns about reduction of net interest income. For example, there is an option to get rid of these reserves, influencing depositors: the banks offer their clients deposit assets in other banks. Thus, the banks shift their headache to others.
The next option is to increase lending rates in opposition to the ECB. The Swiss bank system took this step, increasing long-term rates on mortgage lending after the SNB cut its rate to negative level. Mario Draghi noted that decision to toughen monetary policy was not an optimal decision.
There is another option – when excess volume of assets is credited to other bank organisations. After a lending crisis interbank lending fell in the Eurozone. Mario Draghi and the ECB members express an opinion that it is necessary to stimulate this system in order to ease lending conditions. In this case, some banks as German banks may be forced to give credits to rivals of the Southern Europe.
Apart from negative rates it should be mentioned an influence of current QE programme. The asset purchase programme leads to an increase of banks’ balances. The more this programme is active, the harder for banks to lower negative impact of “easy money” on their profitability.