Some of Europe's most senior bankers have warned the European Central Bank of the dangers of negative interest rates ahead of a widely anticipated cut at the bank's policy meeting on Thursday.
The ECB is expected to cut its deposit rate by 10 basis points to minus 0.4 per cent as it takes further action in its struggles to lift persistently low inflation and boost economic growth back to normal levels.
Bank leaders are alarmed by the crippling effect on their profits of negative rates which they cannot pass on to ordinary customers, adding to concerns about the fragility of financial stability in some parts of the euro zone.
But any attempt by the ECB to shield lenders from the effects of negative rates could weaken the policy and open the central bank to claims that it is engaged in a beggar-thy-neighbour devaluation.
Andreas Treichl, chief executive of Austria's Erste Bank, said another cut could encourage financial bubbles, hurt economic growth and create "social disparity" by penalising savers.
José García Cantera, Santander’s chief financial officer, added that the banks that would take the biggest hit to their profits if rates were cut again were those least able to bear it.
Last week, Sergio Ermotti, UBS chief executive, warned that excessively low rates were prompting banks to extend too many risky loans because they "don't know what to do" with deposits.
The industry hopes to lay out concrete evidence of the detrimental impact negative rates are already having in mid-April, when the European Banking Federation will present the results of a review into how its members are being affected.
For now, bankers are speaking publicly on the dangers in the hopes that ECB policymakers will heed their warnings as they consider cutting deposit rates at Thursday’s meeting. Deposit rates at minus 0.4 per cent would be higher than Switzerland’s minus 0.75 per cent, but a historic low for the euro zone.
The ECB is considering ways to insulate banks from some of the impact of negative rates. Vitor Constâncio, ECB vice-president, hinted last month that it could follow the Bank of Japan and introduce a tiered rate system to exclude some bank deposits. However, that would blunt the effectiveness of the negative rates policy and other policymakers have said it is not the central bank's job to protect lenders' profitability.
Erste’s Mr Treichl, the longest-serving chief executive of a major European bank, said the ECB’s “limits have been reached” after years of ultra-loose monetary policy that has failed to lift inflation to anywhere near the ECB’s target of “close to but below” 2 per cent.
“What is being overlooked is that in a very substantial part of Europe and particularly in our region, savers are risk adverse and capital markets are not very prominent, [which means that] lowering interest rates is not very helpful in stimulating economic growth,” he said.