By Francesco Canepa
Battered by years of low- interest rates, eurozone banks, including Irish lenders, are looking at a multi-billion-euro consolation prize if the ECB grants them an expected reprieve from its penalty charge on deposits, according to Reuters calculations.
But the windfall that would result if the ECB introduced a tiered deposit rate — something policymakers have been debating for months — is unlikely to be distributed equally, with lenders in France and Germany best placed to benefit from a complex but clumsy system.
With global trade tensions morphing into a currency war, the ECB is likely to cut its -0.4% deposit rate — effectively a charge on banks’ idle cash — further into negative territory in September.
Markets are pricing a rate of -0.6% by the end of 2019. The cut will probably be accompanied by a pledge to keep rates at rock bottom for even longer and by new bond purchases — measures to keep a lid on the euro and eurozone borrowing costs.
This spells trouble for banks, which are already extending loans at record-low rates and cannot pass on the ECB’s deposit charge to households — the main source of funding for many of them.
To soften the blow, ECB president Mario Draghi said any cut would come with “mitigating measures”, likely a partial exemption from that charge in the form of tiered deposit rates.
Banks are currently paying some €7bn per year to the ECB on cash parked there that exceeds mandatory reserves. This would rise to €8.8bn if the deposit rate was cut to -0.5%, according to Reuters calculations, based on data to the end of June.
Experience with similar schemes from Japan to Switzerland suggests it may worth between €4.4bn and €6.6bn per year, assuming a 10-basis-point rate cut and depending on how it is designed.
Whatever option is chosen, designing such a scheme won’t be easy and it could even backfire by pushing rates up in certain countries, rather than down. If the ECB were to grant a reprieve on up to 10 times’ minimum reserves, eurozone banks would save €5.3bn per year compared to now and €6.6bn compared to a flat -0.5% rate.
But with excess cash concentrated in richer countries with large financial centres, disproportionate savings would be seen in Germany and France, exceeding €1bn in each country.