Bundesbank Revives The Debate About ‘Ultra Low’ Rates Hurting The Small Banks

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Next Thursday, there will be a “collision” between the two factions in the ECB, the softer and the more orthodox. In the midst of the pre-electoral campaign Germany, they have revived the debate on some issues which appeared to have been forgotten, This is with the aim of strengthening their hand in the face of what they consider to be the ECB’s excessive laxity.

For example, as Intermoney points out, one issue is the adverse effect of the current interest rate scenario on the banking sector and, in particular, the smaller German lenders.

According to the analysts, the latest survey carried out by the Bundesbank and BaFin (Germany’s Federal Authority for Financial Supervisión) highlighted a matter which is causing great concern for the “European growth driver”: the “ultra low” official interest rates continue to “strongly weigh” on the smaller German banks. The afore-mentioned survey showed that the small and medium-sized institutions expected a drop in pretax profit of 9% in the next five years. This would translate into an estimated 16% decline in return on capital.

The survey went further, flagging that the profitability of the small German banks could decline to 40%, if rates are kept stable until 2021. That said, Intermoney notes that in Germany it’s hard to admit that the big problem is not so much in the rates as in the fragmentation of the sector.

In the same way, we need to keep an extremely descriptive figure in mind: the survey covered about 1,500 small and medium-sized banks which account for 88% of the institutions and 41% of the German banking sector’s total assets.

The above-mentioned fact which Germans forget about when analysing the banks’ problems will no doubt resurface in their argument next Thursday in Frankfurt in favour of a progressive withdrawal of the ECB’s stimuli.

In addition to these arguments, there are the increasing difficulties to cover the percentage of German debt purchases within the QE programme, against a backdrop where our central bank’s purchases are combined with healthy public finances.

In the first half of 2017, Germany’s public surplus reached a record high of 18.3 billion euros, equivalent to 1.1% of GDP accumulated in the year to date. So at end-2017, German debt could be 65% of GDP, at around 2.1 trillion euros. The issue is that only 70% of this is in securities, in other words, nearly 1.5 trillion euros, and the ECB already has German securities worth over 400 billion euros. In conclusion:

Taking into account the current limit of 33%, we are not far off filling the possibilities. Particularly when we should only recognise debt with residual maturity of between 1 and 30 years.