German banks get along well with negative interest rates

By Hans Bentzien

FRANKFURT (Dow Jones) According to the Bundesbank, German banks have so far been able to cope with the negative deposit interest rate of the European Central Bank (ECB). As the Bundesbank explains in its current monthly report, the interest margins in the deposit business fell by the time of the Corona crisis, but this was offset by other effects of monetary policy.

In any case, the banks did not reduce their credit supply as a result of the negative deposit interest rate, which would have been cause for concern for the Bundesbank as part of the Eurosystem, as that would have impaired the transmission of the monetary policy signal. It remains to be seen, however, whether the banks will have to limit their lending due to higher loan defaults.

Euro area banks have had to pay interest on their excess investments at the ECB since 2014, whereas in the past they normally received interest. The ECB wanted to give the banks an incentive to make their liquidity available to private households and companies. In its report, the Bundesbank comes to the conclusion that this also worked out in Germany.

An unpleasant side effect of this policy from the banks’ point of view is that they cannot simply cushion the negative deposit interest rate by passing it on to their customers one-to-one. Especially in business with private customers, negative interest rates tend to be the exception, whereas in companies they are the rule.

According to the Bundesbank, the banks were nevertheless able to expand their interest income by granting more and longer-term loans. In addition, the good economic situation enabled them to reduce their risk provisions. After all, the ECB understood how to release part of the banks’ excess deposits from the interest rate, which has now been reduced to minus 0.50 percent – six times the reserve requirement.

In its report, the Bundesbank does not address the frequent complaints from banks about negative deposit rates. Rather, it gives the impression that the ECB’s monetary policy, for which it is jointly responsible, has worked as intended. The Bundesbank also seems cautiously optimistic with a view to the time now beginning of higher risk provisioning.

While the economic downturn is increasing the likelihood of the negative interest rate having an “adverse effect” on lending, the measures taken by monetary, fiscal and banking supervision are reducing this likelihood.

ECB officials have repeatedly expressed the assessment that the ECB’s interest rate level has not yet reached a level above which monetary policy no longer supports lending, but rather reduces it (“reverse interest rate”). Since the beginning of the Corona crisis, representatives of the financial industry have been calling for a higher exemption from deposit interest.

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DJG / hab / apo

END) Dow Jones Newswires

October 26, 2020 07:00 AND ( 11:00 GMT)

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