The European Central Bank must consider the impact of negative interest rates on the profitability of the region’s banking system, Governing Council member Klaas Knot said.
The ECB’s loose monetary policy is driving European lenders to reduce the rates they charge for new loans. At the same time, their funding costs aren’t falling because they’re hesitant to further reduce deposit rates that are already near zero to prevent customers from withdrawing their cash.
“The low interest rates not only create problems for life insurance companies and pension funds, but it also hurts the interest rate income for banks,” Knot, who is also the President of the Dutch central bank, said at a press conference in Amsterdam, where he presented the bank’s Financial Stability Report on Tuesday. “This puts pressure on banks’ profitability.”
Knot’s comments follow observations by ECB Executive Board member Yves Mersch, who said on Monday that banks that can’t withstand temporary strains on their earnings may have bigger questions to answer about their future viability as businesses.
ECB President Mario Draghi has pledged to keep up efforts to boost consumer prices in the euro area. With interest rates at a record low and the ECB buying 80 billion euros ($90 billion) a month of debt, he last week renewed his plea to governments to use ultra-loose monetary policy as an opportunity to deliver structural reforms and help create a sustainable recovery.
The ECB will have to weigh the side effect of the accommodative policy to the extent to which it is effective in reaching its price-stability goal, Knot said it the report. The central bank’s measures support economic recovery, he said. At the same time, the asset-buying program has flattened the yield curve, making it more difficult for banks to earn money, he said.