Published On: Fri, Sep 6th, 2019

European Central Bank’s OWN rules are crippling Europe’s economy – still want to Remain? | World | News

Top of the agenda at the European Central Bank summit next week is a fresh economic stimulus package to breathe new life into the struggling eurozone. But the ECB bosses face tough questions about the unprecedented loosening of eurozone monetary policy which began in 2012 when ECB chief Mario Draghi said he would do “whatever it takes” to support the single currency.

Mr Draghi’s measures resulted in negative interest rates with the ECB’s main deposit rate hitting zero that year and successive reductions taking it down -0.4 percent where it has remained since 2016.

But critics are growing increasingly concerned about the policy’s downsides and warn the negative rates weaken the eurozone’s already fragile banking system and discourage lending while motivating insurers, banks and savers to hoard cash.

Volker Hofmann of the Association of German Banks said eurozone lenders pay £6.72bn a year in negative rates on the excess deposits they hold at the ECB.

He told the Financial Times: “It is a remarkable burden for banks who find it more or less impossible to convey this cost to retail savers.”

The European banking sector has struggled since the financial crisis took it to its knees 10 years ago.

Shares still trade below book value and equity returns remain lower than the cost of capital in most cases.

The negative rate question centres on the theory of a reversal point below which further cuts in a central bank’s deposit rate subdue lending activity by banks.

Join research from the US Treasury department, the University of Bath, the University of Sharjah and Bangor University found “robust” evidence that bank lending growth was weaker in countries with negative rates and impact was greatest on banks funded mainly by retail deposits.

It has become more common for European banks to charge fees for current accounts but they only mitigate a fraction of the extra cost of negative rates.

Jean Pierre Mustier, chief executive of Italy’s UniCredit and president of the European Banking Federation, said: “In such an environment it is important that European banks are not put at a competitive disadvantage in terms of ability to attract capital because their profitability might be structurally lower than others, namely the US.”

Olaf Scholz, Germany’s finance minister, said recently that he would examine whether it was possible to protect savers by banning banks from passing on the cost of what he called the ECB’s “penalty rates”.

Mr Draghi has always insisted that while some policies may have negative side-effects, the overall impact of its radical policy loosening has been beneficial.

Source link

Most Popular News