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.



Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Acuity Knowledge Partners

Acuity Knowledge Partners


We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points.