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Banks are not hit very hard by negative interest rates

D.German banks often complain about the negative interest rates of the European Central Bank (ECB). Reason enough for the Deutsche Bundesbank to deal in its monthly report for October with the question of how badly the negative deposit rates introduced by the ECB in 2014 under ECB President Mario Draghi actually hit the German banks. The result is divided into two parts: So far, the Bundesbank claims, at least on the basis of its surveys, the banks’ interest margins have decreased, but this has not been accompanied by a deterioration in bank profitability in Germany as a whole. On the other hand, things could change now – in connection with the special consequences of the corona pandemic for the banks.

The reasoning of the Bundesbank economists goes as follows: In June 2014, the ECB Council decided to reduce the deposit rate for banks from 0 to minus 0.1 percent. This was the first time that a key Eurosystem interest rate was in negative territory. In the following years, this interest rate was gradually reduced to minus 0.5 percent. According to the Bundesbank, some market interest rates and yields turned negative after June 2014: Initially, the money market rates followed the interest rate of the deposit facility below the zero line. “Negative long-term capital market returns were only observed with some time lag and with interruptions.” The interest rates that banks set for their customers’ deposits remained largely at the zero line, however. The average interest rate for deposits at German banks in August 2020 was 0.01 percent. Although 63 percent of banks took on average negative interest rates from companies, this is less common among private customers, writes the Bundesbank, without giving precise figures. At the same time, lending rates continued to fall in line with the general trend in interest rates: “As a result, the interest margins of German banks in the lending and deposit business have narrowed.”

But: In a comparison of bank profits in the phases from 2014 to 2019 (with negative interest rates) and 1999 to 2007 (without negative interest rates), the Bundesbank comes to the conclusion that the banks’ net interest income has declined – but not much has changed in the pre-tax surplus done.

The Bundesbank’s statement: There was an opposite effect to the falling interest income, namely a decline in risk provisioning in the lending business and an increase in the loan volume. The Bundesbank now interprets this as saying that the expansionary monetary policy of the ECB on the one hand burdened the banks with the interest margin, but on the other hand also supported the economy and credit demand, which benefited the banks, among other things, in terms of risk provisioning. It could be more difficult for the banks now, say the Bundesbank economists, if the risk provision increases due to the corona failures. Then it would no longer be so easy to compensate for the shrinking interest margin. This could also affect banks’ willingness to lend.

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