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This article was published March 11, 2016 at 07:04 hours.
the last change is the March 11, 2016 at 17:22.
the European Central Bank yesterday announced a cut in the deposit rate from -0.3% to – 0.4%. The markets were expecting it and had already carried out some time in this direction “lowering” the yields on government bonds (German title two years has even slipped to -0.5%). Yet a further cut in this rate is not that it is precisely appreciated. Bank stocks are soaring at the Milan not so much for this post, but for the other (ie the ECB will lend their money to four years with negative rates of up to 0.4% through new T-LTRO auctions that will start in June) and they are rising also because of the fact that yesterday the ECB has hinted that it will not reduce the deposit rate over 0.4%.
There are at least four reasons why a cut interest rates on deposits not like banks. Firstly, because for the banks that a rate is a fee. The rate on deposits with the ECB normally represents what the ECB should remunerate the reserves held by banks at its account. But since it is negative the opposite happens. They are indeed private banks now have to pay a fee to the ECB to park excess reserves. This fee is paid only on excess reserves, and not on those mandatory by law that banks must hold (today this reserve requirement is 1%).
Not pleased because for banks, whenever you reduce official interest rates, it also reduces the potential profit margin that institutions can derive from the activity of the employed by lending cash to households and businesses. According to Morgan Stanley cut the deposit rate to 0.4% from the ECB will lead to a contraction of 5% of the profits for next year.
It is not good news because such low rates ( and, moreover, negative) highlight another kind of problem: the banks are wondering now whether and how to download the fee they pay to deposit excess liquidity with the ECB about the customers. In Switzerland – where the rate on deposits that private banks pay to the Central Bank is -0.75% – there is an institution that is passed to the facts: the Alternative Bank Schweiz fact applies a negative deposit rate to customers. Sergio Ermotti, CEO of UBS, said that at this point the banks “do not know what to do” of deposits.
At the same time negative deposit rates are inflating again imbalances between European countries, highlighted by Target 2 balances that are a kind of snapshot of the state of trust between the banks of the Eurosystem. When there is little confidence balances tend to swell with clear differences between countries. According to the latest data, the credit position of German banks against the Target 2 system has grown to 562 billion euro in October 2015 (latest available data), compared to 460 at the end of 2014. At the same time Italy’s debt position the system has increased by 164 billion early in 2015 to nearly 250 billion Euros.
“the increase in target 2 balances tells us that a German bank at this time prefer to park excess reserves at the ECB , while paying 0.4% tax, rather than lend it to an Italian bank that needs liquidity, which apply a higher rate – explains Andrea Terzi, professor of monetary policy at the Catholic University -. In fact the only tangible effect it can have a cut of the deposit rate is only a temporary decline of the euro. But only temporarily, as long as the Eurozone will produce a trade surplus as it happens for years which in itself tends to increase the demand and the same value of the currency. “
So the banks do not like the cut of the rate on deposits which in any case should not be enough to restore confidence in the compensation system of the European interbank liquidity (Target 2). So why this rate went down? “Good question, it seems that the ECB is a prisoner of market expectations.” A story seen in the United States.
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