Negative interest rates don’t just require an intellectual effort. They also have real consequences. So far the banks have already paid 2.8 billion euros to the European Central Bank (ECB) as a penalty for excess liquidity, BS Markets says.
This fine is the result of the current level of interest rates on the deposit facility. In normal times, these rates were what the ECB paid the banks for the cash they had over and above the mínimum reserves required. Nowadays, these rates represent the interest the ECB charges the lenders for their excess cash.
This is a charge because these rates are now in negative territory. And they have been like that since June 2014. The ECB first established them at -0.10%; then they went to -0.20%, then -0.30%; and in March this year they were cut to -0.40%, which is the current level.
With this strategy, the ECB is trying to provide a stimulus for the banks to provide credit for the real economy instead of holding on to the money. If they don’t do that and keep more cash than is required, they will pay a fine. Although the financial sector considers it more as a tax on their excess liquidity.
The problema is that this incentive is not working out as Draghi had planned. In June 2014, the excess liquidity in the Eurozone was limited to 115.000 billion euros. Over two years later, it’s close to 1 trillion euros, an amount which is unheard of. This proves that the banks are still not converting into loans a good part of the money which the ECB is pumping into the system with its QE programme on the one hand, and with its special long-term bank financing measures (TLTRO II) on the other.
The fact this excess cash is still there is what is behind the interests’ bill the banks are paying to the ECB as a result of the negative deposit rates. For now this stands at 2.8 billion euros and the daily fine is nearly 11 million. This is an added hurdle for the banks at a time when their profitability is suffering precisely because of low interest rates, new regulation and the competition from digital technology.
But the point is that this charge will not stop here, but will keep increasing because the ECB’s expansionary monetary measures are still in place. For the time being, and at least until 2017, the ECB will continue to earmark 80 billion euros per month for purchasing public and private debt in the markets.
And it will go ahead with the TLTRO II operations in parallel, thus supplying the banks with more money.
With this arsenal of measures, and faced with a lack of sufficient demand for credit, it’s a matter of time before the banks’ excess liquidity settles at the 1 trillion euros level. In this event, the bill would be sizeable: a full year with this amount of excess cash and deposit rates of -0.40% would cost the sector 4 billion euros.
Aware of the impact, the ECB designed the TLTRO II operations with the aim of highlighting it. In the same way as it now charges the lenders for their excess money, it plans to reward them for this in the future. They will pay an interest rate equivalent to that of the deposit facility rate, if they increase their lending volumes with the money they receive in these financing operations.
But the banks are not up for waiting. They are already looking for a way of responding to this unprecedented situation with the aim of offsetting the effect of negative rates. The solutions proposed by some of the banks include charging big companies and institutional clients interest on their deposits.