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The ECB May Hurt Bank Profits Even Further

The ECB may deliver a plan to further stimulate the Eurozone economy and help it grow. To do this, they may decrease the already negative interest rates even further to generate additional bank revenue from institutions that park their funds with the ECB. However, banks have already paid billions of Euros to the ECB since the negative interest rate policy was first introduced in 2014, and don't want to incur further costs.

The ECB's measures are designed to help strengthen the economy, increase inflation and make lending costs lower for the corporate sector. However, it is possible that reducing corporate profits may backfire and hurt the economy instead of improving it.

Here’s How Banks Are Suffering

While the ECB thinks that their negative interest rate policy is helping the economy, banks think otherwise. In recent times, many officials from the affected banks have clearly stated that the negative interest rate policy is a huge financial burden for them as well as for the economy.

Due to the constantly deteriorating economic condition of the Eurozone, the ECB has started conducting regular meetings to devise a proper plan to address the potential risks. One such option they believe may help the economy is a lower inflation rate.

Negative interest rates were first introduced in 2014. Prior to that, all banks used to get some interest for depositing large amounts of money with the ECB. Today, the interest rate is -0.4% and banks are charged to deposit funds. Therefore, money which used to return profits now incurs fees or penalties instead.

Will The Banks Pass On This Burden?

Since banks are being charged to park the money with ECB, the most reasonable step would be to pass this burden on to larger corporate clients. However, squeezing the customers too much can cause them to withdraw the money. For this reason banks usually bear this extra penalty by narrowing down their profit margin.

Like any business, banks have a limited margin of profit. If the penalty amount exceeds a bank's profit margins, the bank would then be compelled to recover the amount from their customers. This point is known as the reversal rate, and it can badly damage any economy if it goes out of control.

How Much Have The Banks Paid So Far?

According to official statistics, banks have paid around $25 billion (equivalent in Euros) to the ECB since the introduction of the negative interest rate policy in 2014, and are still paying around 7 billion Euros each year. No matter how much burden is imposed on the banks, the rate according to the ECB officials is very low and is well within the banking sector’s reach.

President of the ECB, Draghi, confessed in a conference that the banks are nearing a reversal rate. The ECB is expected to propose a multi-tiered system to give the banks some relief in the negative interest rate policy. The banks have suggested that while the introduction of a tier system might help a bit, steps like these won’t eradicate the problem of negative rates.

A History Of The Negative Rates

Negative rates are not a new thing, as many central banks have introduced this system to help strengthen the economy.

Japan introduced the negative rate policy back in 2016, but this policy didn’t work as expected and ended up hurting the economy more than helping it grow faster.

The SNB (Switzerland) on the other hand has also introduced a negative rate to depreciate their currency and strengthen their export market.