Banks are watching how the European Central Bank (ECB) president, Mario Draghi, will weaken the prescription of lowering interest rates.
ECB President, if already level 0 Below Lowering interest rates can have economic weaknesses, so banks' profitability can be taken to reduce the amount of credit they can take to take action. Financial institutions have long complained that customers can not stock the amount paid by their customers overnight.
The last signal of this shock is to see again on Wednesday when German bank Deutsche Bank issues the final results of the problem. The Euro Zone bank unexpectedly tightened corporate credit standards in the second quarter of this year, according to an ECB study on Tuesday.
Of the five central banks with benchmark interest rates below zero, the ECB alone has no way to deal with this negative impact. It is not so easy to create a fair system for the 19-nation euro zone. Two thirds of surplus deposits are in Germany, France and the Netherlands, with only 10% in Italy and Spain.
In this context, some of the questions the ECB Governing Council will meet this week are:
What should I do?
The most common suggestion is known as tiering. Therefore, some deposits may be exempt from the application of a negative understanding, or the application may be at a different rate. The Swiss Central Bank excludes 20 times the minimum reserve (cash required by all banks at the central bank). This amount will be charged at a rate of 0.75%.
The Danish central bank is implementing a dual stratification system. Banks can park their money for free some nights, but they are charged at a rate of 0.65 percent or more instead of a one-week periodic deposit.
When the Bank of Japan went to its original interest rate in 2016, it implemented a triple stratified system. The minimum holding and liquidity obtained from the assets sold by banks to the Bank in the monetary expansion program are exempt from pricing. At this time, 0.1% of the fund was billed.
How much should I waive?
European banks recorded a liquidity surplus of more than $ 1.7 trillion ($ 1.9 trillion) in the ECB every night. Except for 0.4% in the ECB deposit rate, the bank has more than 7 billion euros. Benoit Coeure, member of the ECB executive committee, said the cost is "low" and the focus should be on technology competition and bad credit.
But analysts at Rabobank do not think banks can afford such high costs. Analysts say the ECB should cut deposits interest by 0.8 percent next year and exempt excess liquidity by about 800 billion euros for mitigation.
Louis Agricole, a creditor Agricole, said, "I am willing to give up credit as a condition of the hot potato effect and, as a result, to lower the interest rate on the whole economy, I can not. " The ECB should first exempt 250 billion euros and increase exemptions, up to a maximum of 1 trillion euros, Harreau added.
Could it counteract the effects?
A large consistent exception is often helpful for banks with large amounts of deposits. In the euro zone these institutions are mainly located in northern countries and the economy is being criticized for unfair support.
Banks with big exceptions will feel less pressure to lend money as a loan against the "hot potato" principle. According to Barclays economists, this can have a negative impact on the market, especially in neighboring countries, and raise interest rates.
In addition, the ECB's TLTRO program (providing long-term loans to banks with low interest rates) makes the situation even more complicated. In some cases, it can be a chance for arbirtraj from Rabobank's point of view.
Barclays and Rabobank say the ECB's TLTRO loans should be excluded from individual bank deposits and exceptions. This primarily creates banking groups with net deposits in Northern Europe and the most frequent banking groups in the south.
Both groups will gain profits. Banks with net deposits are covered by the stratified exception rule, while the net borrower reimburses them under the generous terms of the TLTRO.
What else can the ECB do?
Draghi has always talked about the need to mitigate negative interest rates. This does not necessarily mean layering. According to Gilles Moec, chief economist at Axa and a member of the Central Bank, ECB could be one of the options to start buying bank debentures. This step reduces funding costs by eliminating the costs that banks may incur from other deposit rate cuts.
But this is a controversial step. The ECB has previously opposed inclusion of bank debentures in the currency expansion program. This step may be a conflict of interest because the ECB is the supervisory body of the euro area banking system. However, Moec believes there is a dilemma in all of the proposed options.
We currently do not think this step is actually at the top of the ECB's preference at this stage, Mo Moec said.