SHARES: Why banks suffer from ECB's decision?


*Banks are the ultimate source of liquidity 
*ECB isnt at its reversal point yet
*Traders have already priced in another rate cut but they have not paid attention to bank stock 
*Fiscal spending may bring some relief for banks 



 

Just how deep can negative interest rates go? Well, you do not have to wait for long to find the answer to this question because the European Central Bank (ECB) is going to occupy the stage on Thursday and this particular question will be answered.

 

The Mandate 

Market participants are widely expecting the ECB to rotate the interest rate screws again and financial institutions are going to feel the pain because of deeper negative interest rates. The ECB’s mandate is to spur growth and inflation in the eurozone and in order to do this, they are committed to do “whatever it takes”, a slogan which the president of the European Central Bank used, to achieve this.

 

The blow for this tactic has the largest adverse impact for banks such as Deutsche Bank AG, UBS Group AG and many other. These banks have been battling with sub-zero monetary policy for almost half a decade now and a further squeeze is going to hamper their bottom-line figures. Remember, banks provide liquidity into the system for households and companies and pushing the bar too far may break it altogether. Long term negative interest rates can not only drain banks but also, they can collapse the financial system.

 

However, the ECB isn’t willing to pay much attention to these factors as they have bigger problems on their doorstep such as U.S. protectionism and the Brexit circus. The bank starts its two-day monetary policy meeting today and concludes it tomorrow and the probabilities of a softer blow aren’t favourable.

 

How Much Have The Banks Paid? 

Banks used to park their excessive capital with the ECB to earn interest, however, that interest rate currently stands at -0.4%, which means banks like Deutsche have to pay to park their cash with the ECB. This sub-zero interest rate results in billions of euros for banks. Since 2014, when the ECB started the negative interest rates, banks have paid nearly 23 billion euros. The current cost for banks stands at nearly 7 billion euros a year.

 

Banks have digested this cost by passing it on to their corporate clients, but retail clients who have saved money by working hard are going to be left with no option but to withdraw this cash. This is going to create a much deeper liquidity strap for the ECB as these deposits are the main source of financing for banks.

 

What Is The ECB View About These Charges?

The European Central bank is confident about their approach and the bank believes that the current cost for banks is like peanuts. Their focus, for the time being, is only to promote long term growth and stability.

 

What Is The Reversal Point? Are We There Yet? 

The European Central Bank does know that it cannot just keep pushing the interest rates lower and lower. The point where the bank thinks that it has reached its maximum limit is the reversal point. The former vice president of the bank has mentioned that he thinks that the ECB has reached that point. However, the president of the ECB, Mario Draghi, only acknowledges the risk associated with negative rates. He doesn’t think that we have reached the bottom yet. This leads me to believe that the ECB is going to continue to push this bar for now.  



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