Eurozone banks store almost 2 Bn€ which they return to the ECB because of the troubles in “putting it to work”

Intermoney | Market concerns persist, and there seems nothing in the short term that will change this. In fact, the latest ECB Financial Stability Report gave evidence of the nest of problems and risks in which we have found ourselves for some time, while recalling the downside balance of current risks.

In few words, the bank points out that “the low profitability of the banking sector, elevated sovereign debt in some countries and the increase in companies with poor credit ratings represent the main vulnerabilities of the financial system”. On the other hand, it highlighted, as a major positive aspect “the increase in banks´ capital cushion and the existence of a “more diverse financial system”.

The last point is subjected to important nuances, as the greater “diversity” of the financial system also means the appearance of less regulated actors which generate other risks. Nonetheless, the challenge that low profitability supposes for Eurozone banks is unquestionable, as confirmed by the data published by the ECB. According to this, the ROE for the main Eurozone banks will be less than 6% in 2019, and will oscillate between 4% and close to 8%. Low levels given the high capital costs for banks.

This raises the debate about the collateral effects of negative interest rates, and recent messages in which the ECB has reduced expectations about possible mechanisms to dilute the charges on banks for using the deposit facility. For example, at the end of last week, the liabilities of our central bank amounted to 571.308 Bn€ in the deposit facility and 1,398.985 Bn€ in current accounts (including minimum reserves). So Eurozone banks saved almost 2 Bn€ which they returned to the ECB because of the difficulties in “putting it to work”. This supposes a significant cost which could be even worse if it were not for the behaviour of the central bank itself.

In the previous line, ECB Vice-President Luis de Guindos highlighted the positive role of negative interest rates for the Eurozone banking system, albeit from another point of view: that relative to activity. The monetary policy implemented from Frankfurt has been key in establishing us in the current recovery cycle and, without it, banks bad debts would be worse and credit demand less.

So the situation of Eurozone banks could be worse. In fact, currently, the major problem for Eurozone banks is not so much the negative interest rates which erode their margins, but rather the improvable efficiency or the insufficient credit demand for putting excess resources to work. A reality which continues, although last Tuesday the M3 credit counterparties delivered a pleasant surprise in the Eurozone.

In the former line the ECB also signalled the burden for the Eurozone banking sector resulting from the high weight of non-performing operations and inefficiency in their structure. In Frankfurt they estimated that the bad debt levels of the major European banks at 1% compared to the 4% of international comparators, while their efficiency rate is below 70% compared to the over 60% of the same international comparators.

Before leaving the banking question, it is worth comparing it with the situation in the US. The situation in the US banking sector seems better, and the FDIC announced that that Q119 ended with an increase of profits of 8.7% yoy (+2.9 Bn$) to 60.7 Bn$, at the same time as the number of banks in difficulties fell to 59. The lowest figure since the first quarter of 2007.