Chartering the uncharted: Negative interest rates and Euro-banking

  • EU banks’ deposits spiked, growing at a 2.5% CAGR over 2014–19 6. The EU household savings rateb reached its highest in 2Q 20207.
  • Banks continue to delay passing on statutory costs to general retail depositors (i.e., households) 4.
  • As interest rates become more negative, the pass-through effect on deposits held by corporates (non-financial corporations) intensified, as evidenced in Germany, Luxembourg and the Netherlands 4.
  • Pressure keeps mounting on banks’ asset and liability management (ALM).
  • The ECB’s appetite for a lower-for-longer policy rate to shift to higher negative-rated EU savings over time. Larger banks to be more resistant to passing through costs to retail depositors.
  • Negative-rated household deposit growth over time to pose higher debasing risk to banks’ stable funding.
  • To compensate for low core margins, banks are most likely to pursue unconventional riskier avenues (e.g., trading) to prop up profitability.
  • EU total loans increased at a 2.7% CAGR over 2014–19 6. Housing loan growth remained strong.
  • The ECB’s negative DFR contributed to an increase in lending volumes and a decrease in lending rates across loan categories 8.
  • Banks’ overall terms and conditions on new loans to enterprises continued to tighten, driven entirely by riskier non-financial corporation loans 8.
  • Generally low level of interest rates to increase appetite for new and refinancing loans in the housing segment.
  • Impacted by the pandemic, banks’ tighter credit-control measures to continue in the near term.
  • The ECB’s asset purchase programme and liquidity support measures to significantly ease banking-sector credit risk.
  • EU banks’ loan-to-deposit margin cdropped to 2% in 2019 from 2.6% in 2012.
  • The Eurozone remains the lowest-ranking banking region in terms of ROCE11. The cost-to-income and cost-to-asset ratios of EU banks remain above their 10-year averages 12.
  • Contrary to popular notion, NIRP has a negligible effect on banks’ profitability. Borrower de-risking and loss-provision reductions are considered to be offsetting factors.

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Acuity Knowledge Partners

Acuity Knowledge Partners

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We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://www.acuitykp.com/