European banks have stepped up their protest against rock-bottom interest rates ahead of this week’s ECB meeting, which is expected to underpin a policy that tramples their profits and has even pushed some to offer free loans.
The president of Germany’s powerful savings banks association, community lenders that dominate the country’s shopping streets, joined Dutch bank ING yesterday in criticising the ECB’s loose monetary policy.
“People feel there is an ever bigger hole in their future pensions. They are saving more because they are not getting any interest,” said Helmut Schleweis.
Low interest rates coupled with penalty charges on banks that hoard cash is making it more expensive for the banks to hold customers’ savings and less profitable to lend. The criticism is aimed squarely at those penalties and the interest-rate cuts made by the ECB to buoy the eurozone’s economy after the financial crisis.
The problem is particularly acute for Germany’s biggest banking sub-sector, the savings banks, which have a glut of money that is expensive to hoard.
Its 50 million customers have increased their savings by almost 5% since last year to €965bn which is roughly the size of the Dutch economy. With lending amounting to about €860bn, the banks are left with a chunky unused surplus.
Their concern echoes a recent plea by the head of ING for the ECB to change course. Ralph Hamers, who heads the Dutch banking company, said there was already enough cheap money and that more will not boost weak confidence.
Last week, Deutsche Bank chief executive Christian Sewing also predicted that zero rates “will ruin the financial system”.
The ECB’s stance has prompted heated public debate in Germany, a country of savers who prefer holding cash to buying shares. Dietmar Schake, of German safe manufacturer Burg Waechter, said demand for its safes increased by a quarter in the past five years, partly because of fear over interest-free savings.
The ECB policy of charging banks for hoarding cash, introduced in 2014 to encourage them to lend more to bolster a flagging economy, has exacerbated problems for banks but there is no indication of any change in tack. Amid tensions between China and the US, the UK at risk of crashing out of the EU, and the German economy slowing, the ECB has all but promised to announce more financial stimulus tomorrow.
ECB officials argue that banks have benefited in other ways, such as through ultra-cheap loans from the central bank as well as the general buoying of the economy and a rise in demand for loans, particularly for homeowners.
As part of tomorrow’s package, ECB governors are expected to steepen the charges for storing cash, known as negative interest rates, though there may also be some relief from the penalty on some of the money parked at the central bank.
The policy has turned the original banking model, lending on the back of deposits, on its head.
This transformation is underscored by Smava, a German online lender that is paying borrowers to take out small loans. Smava said the offer allows borrowers to profit directly from zero rates, with customers having taken out €20m of such credit.