…the controlled demolition of the system continues….
It’s now clearer than ever that the ECB, the IMF, the BIS and all the other supranational alphabet soup creations will do “whatever it takes” in the coming months to keep Deutsche Bank and its brethren whole. But will it be enough? After all, the problems are not remotely contained to just Germany.
by Don Quijones
Zombification of EU banking system gathers momentum.
The past week’s events in Europe were dominated by the pound sterling’s spectacular flash crash to its lowest point in 31 years. As is often the case with flash crashes, we will probably never know what exactly triggered the currency to free-fall by 6% during Asian trading hours, though the most cited cause, apart from a “fat finger,” is the gathering realization that a so-called “hard” Brexit is a very real possibility.
But it’s an eventuality that can be expected to play out in roughly two and a half years’ time, at the earliest, and in light of the powerful forces arrayed against it, it may never occur at all.
In the meantime, something far more dangerous is happening on the other side of the English Channel: the slow-motion meltdown of the Eurozone’s banking system.
In its Global Financial Stability Report, the IMF warned that banks in Europe were too weak to generate sustainable profits even if — and here’s the kicker — the region saw strong economic growth. That hasn’t happened for years.
The IMF also cautioned that the banks’ weak profitability, caused by subdued growth in the Eurozone and ultra low or negative interest rates — something the ECB vehemently denies, preferring to blame the crisis on Europe’s smaller regional or local banks — could further erode their financial buffers and undermine their ability to support economic recovery.
“In Europe, about one third of the system – representing some $7.5 trillion euros in assets – remains weak and unable to generate sustainable profits,” said IMF economist Peter Dattels as he presented the report in Washington. As such, European banks need “urgent and comprehensive action” to address a legacy of non-performing loans and bloated, inefficient business models, he said.
“Urgent” and “comprehensive” are two words you’d rarely associate with the Eurozone, especially at a time when the region faces a relentless gauntlet of political threats, from the rise of “populist” movements in central and northern Europe to December’s do-or-die constitutional referendum in Italy. That’s not to mention what promises to be tightly fought national elections in the Eurozone’s two biggest economies, France and Germany, scheduled to be held respectively in April and October, 2017.
The last thing either Merkel or Hollande needs during election season is a region-wide banking crisis, which is why every effort will be made to keep a lid on the problem until the votes have been cast. But that is not going to be easy, not with Germany’s flagship lender, Deutsche Bank, continuing to sink at an alarming rate.
Things have got so desperate for the Frankfurt-based bank that it may soon be in need of corporate charity. According to a rumor unleashed on Thursday by the German daily Handelsblatt, the chief executives of several German blue-chip companies have discussed Deutsche’s problems and are — if needed — ready to offer a capital injection to shore up the bank.
If that doesn’t steady investor nerves, there’s always Plan Z: create new rules that would allow the ECB to effectively contravene recently introduced rules that forbid it and other EU institutions and nations from directly bailing out financial institutions without first bailing-in some of their creditors. According to Bloomberg, Plan Z is already under way. But instead of being used to bail out the region’s banks, the new legislation will be used to bail out clearing houses, Europe’s new too-big-to-fail monstrosities:
Draft EU legislation seen by Bloomberg sets out rules on saving or shuttering clearinghouses that would apply to firms such as London-based LCH. The proposals cover everything from the creation of resolution authorities to the powers they would have when winding a company down, including writing down shares, debt and collateral.
The ultimate aim is to dampen investor concerns about the threat posed by the global derivatives time bomb, much of which is tick-tocking on and off the balance sheets not only of Wall Street’s finest, but also of Deutsche Bank. Here’s more from Bloomberg:
The authorities would be able to recapitalize the clearinghouse by seizing variation margin, exercising cash calls defined in recovery or resolution plans and writing down capital and converting debt securities. They would also be able to auction off the defaulters’ positions, tear up some or all contracts and access default funds. The relevant central bank would be able to facilitate resolution by supplying temporary liquidity.
And here’s the real kicker (emphasis added):
“Should these options be unavailable or be demonstrably insufficient to safeguard financial stability, government participation in the shape of equity support or temporary public ownership could be considered as a last resort,” according to the proposal. Those steps would need to comply with EU rules on state aid.
As recent months have shown, EU rules on state aid are extremely elastic, especially when it comes to saving the hide of the continent’s biggest banks and corporations. In August, it was leaked that the ECB has bought bonds from the issuing corporations via “private placements,” thus putting freshly printed cash directly on corporate balance sheets at no cost to the corporation. Yet there’s not been a single whiff of protest from Europe’s competition commissioner.
It’s now clearer than ever that the ECB, the IMF, the BIS and all the other supranational alphabet soup creations will do “whatever it takes” in the coming months to keep Deutsche Bank and its brethren whole. But will it be enough? After all, the problems are not remotely contained to just Germany.
In Italy, JP Morgan Chase’s master plan to save Monte dei Paschi continues to flounder as investors show zero appetite for more MPS capital. In fact, expectations are so low that rumors have already began surfacing that an alternative plan, under the aegis of Italy’s former Industry Minister and senior banker Corrado Passera, is now in the works.
It all reeks of desperation.
So, too, does the semi-clandestine bailout of Spain’s state-owned Banco Mare Nostrum. With the markets showing zero interest in taking the bailed-out entity off the public’s hands, the government is trying to usher it into a forced marriage with largely state-owned Bankia. The message, once again, is resoundingly clear: the only way the bank can be maintained as a going concern is through continued and growing public support.
The zombification of Europe’s banking system — the legacy of years of doing “whatever it takes” to save giant insolvent banks — continues to gather momentum. Things are now so serious that some of the world’s most senior policy makers are not only beginning to warn of a new financial crisis, they’re beginning to turn on each other in public. They include Germany’s dour Finance Minister Wolfgang Schaeuble who, much like the IMF, lays most of the blame for Europe’s current problems on the “ultra-loose monetary policy” pursued by the ECB.
But as always with Schaeuble and Merkel, their complaints are meant for public consumption. When crunch time arrives for Deutsche Bank, and the only institution that can save it is the ECB (perhaps with a little help from the Fed, as on countless occasions before), such criticism will very quickly die down. By Don Quijones, Raging Bull-Shit.
Italy’s Monte dei Paschi’s cleverly concealed debt bomb has had explosive consequences, now associated with a gargantuan crime scene. Read… Rescue of Monte dei Paschi Gets ‘Dark’ & ‘Complicated’
EU Banking Mayhem: One Bank at a Time – Then All at Once https://peoplestrustmalaysia.wordpress.com/2016/09/29/eu-banking-mayhem-one-bank-at-a-time-then-all-at-once/
by Wolf Richter
Investors are not amused.
The European banking crisis simply doesn’t let up. Currently, the big two German banks are grabbing the headlines away from the Italian banks, due to their size and the damage they could do to the global financial system. Other banks are in bigger trouble still, and some have already collapsed, with bailouts and bail-ins getting lined up.
Deutsche Bank had to endure a horrendous Monday after it was leaked on Friday that Merkel had refused to entertain bailing out the bank before the general elections a year from now. Merkel’s popularity has gotten broadsided recently, and bailing out bank bondholders with taxpayer money is just not popular at the moment.
Then Commerzbank, in which the government already owns a stake of 16% as a result of the bailout during the Financial Crisis, graced the headlines with leaks that it would lay off 9,000 employees, nearly one-fifth of its workforce. This will cost about €1 billion, according to the sources. To pay for it, the bank will scrap its dividend for 2016 to reduce the bleeding and preserve capital, in what is turning out to be the hellish environment of negative interest rates.
We’ve been writing about the European banking crisis for a long time, it seems, as it drags on, and meanders from one country to another, and sometimes we write about it in an amused fashion because we’ve got to keep our sense of humor in all this gloom.
But investors who believed in all the hype and in Draghi’s promises and in Merkel’s strength and in the willingness of all of them to do whatever it takes to protect bank bondholders and stockholders, and who believed in the miracle of Spain’s recovery, and in Italy’s new government and what not – well, they’re not amused.
For them, it has been bloody. The global financial crisis got swept under the rug. Then the euro debt crisis took down some banks at the periphery, and taxpayers stepped in to bail out the bondholders, mostly, and a lot more things got swept under the rug. But the problems weren’t solved. And as the decomposing assets under the rug kept exuding their pungent odor, investors held their nose and played along for a while.
But now it’s just getting worse. And investors are wondering what exactly is under these rugs – or maybe they’d rather not know for it’s too ugly to behold. And every time someone does look, for example at the Italian banks, they find even bigger problems that have started to metastasize.
This banking crisis has the potential to transmogrify into a financial crisis. All it takes is for one of the big ones to suddenly topple. The flow of credit would freeze up instantly. In an economic system that depends on credit, and whose lifeblood is credit, such an event is a financial crisis.
The problem isn’t restricted to a couple of Italian or German banks. It’s deep and wide.
Here are the 29 banks in the ESTX Banks Index of Eurozone banks (so Swiss and UK banks, for example are not included). It shows the percentage drop from their 52-week high. But for some of these banks, particularly for Italian and Portuguese banks, that 52-week high was just about last year’s 52-week low, so relentless has their decline been over the years. Some of them had already been reduced to penny stocks years ago, and for them, in euro terms, the biggest losses occurred back then. So these mayhem banks, color coded by country:
If a bank stock plunges from €0.04 to €0.01 over the 52-week period, such as Banco Comercial Português in Portugal, it has been toast for longer than 52 weeks, and the percentage plunge is essentially meaningless because shares were worthless to begin with.
The shares of five of these banks trade under €1. Another 8 banks trade under €3. These 29 banks form a big part of the European financial system. It includes some of the world’s largest banks, such as Deutsche Bank, Societe Generale, and BNP Paribas. It includes a slew of other “systemically important financial institutions,” such as Unicredit, ING, and Santander.
They’re troubled at the same time. The can has been kicked down the road for years. Now negative interest rates appear to have inadvertently crushed the can.
So when will Merkel buckle? Read… Deutsche Bank in Free Fall. Shares, CoCo Bonds Plunge. Merkel Gives Cold Shoulder on Bailout. Bank Denies Everything
There you have it: a perfect summary of the European Union philosophy. In comments which were presumably made without embarrassment, a clutch of senior EU officials last week provided the Telegraph with a concise summing up of how this thing works. The UK, they said, will be forced to give up on Brexit when faced with “the bureaucratic nightmare” in which it will be entrapped by the most vindictive (sorry, the toughest) negotiations that could be devised.
If I hadn’t long passed the point of being shocked, I would find this breathtaking. Here it is, laid out in the most blithe, confident terms: the shameless contempt for a clear expression of democratic will, and the blatant use of the power of an unelected bureaucracy to undermine the intentions of a national government. Not to mention the utter, imperturbable belief in their own righteousness which justifies what might seem to the benighted oiks who think there is some sort of virtue in self-government, like an outrage.
There are two possibilities here. The first is that this supercilious confidence in the inevitable triumph of the EU steamroller is just bluster. In truth, the real power in Europe lies with the heads of national governments who are in rather closer touch with reality, having to submit themselves to electorates occasionally, than those obnoxious Commission officials who tend to do most shooting off at the mouth. Hence, Angela Merkel’s less sanguine observation that the EU was “in a critical situation” (as is her Christian Democratic party, it turns out) and even, presenting a rather different face from the belligerent one he generally displays to a British audience, Jean-Claude Juncker’s judgement that the EU was facing a “battle for survival”.
Even within the more rational, and less vociferous, of the Brussels apparat there is probably some understanding of the British historical tendency to remain undaunted (and even strengthened in their resolve) by threats. Surely, among the saner elements, there is an appreciation of the danger of popular unrest which is spreading like a virus in so many member states and which cannot simply be derided into extinction or crushed by fiat. Donald Tusk made much of his pronouncement that the Bratislava summit would need to produce a “sober and brutally honest assessment” of the current situation. So yes, maybe the arrogance of those anonymous officials who count on being able to bully the UK into dropping all this Brexit nonsense is nothing but – if you’ll forgive the term – Dutch courage.
That is the more reassuring interpretation. The most egregious of the EU blowhards are just stomping around, making as much noise as possible and encouraging their underlings to brief the media in cocky terms designed to demoralise the UK side of the negotiations before they start. But there is another possibility. Maybe it’s the supposed realists – the sombre, practical, hard-nosed wise heads who claim that they fully, absolutely, no doubt about it – comprehend the risks of the disjuncture between the present condition of the EU and the restiveness of its populations, who are putting on a show. Perhaps all that pious reverence for democratic discontent and furrowed concentration on the mass defection from the ideal of “European unity” is a sham.
How, when you think of it, could it not be? The institutions of the EU were devised for precisely this purpose: to ensure that the People with their mad, dangerous ideas could never again get the upper hand. Britain, after all, allowed the mob to be heard on the sacred question of membership and look what happened. Every other member state with similarly deviant tendencies will now have to be taught a lesson by watching the British being taken down to the punishment cells where truly terrible things will be done (most of which we haven’t thought of yet because we can’t figure out how to do them without appalling consequences for ourselves).
But whoever is bluffing, there are some things that are indubitably true in all this. Certainly, the EU is, in Mr Juncker’s own words, now in an “existential crisis”. It is also true, as his even more bellicose colleague Guy Verhofstadt – who is to be chief Brexit negotiator – likes to imply dismissively, that the UK question is a relatively minor factor in the crisis. (Mr Verhofstadt has been threatening dreadful retribution since David Davis described him as “Satan” when appearing at the foreign affairs select committee. Note to EU: that was a British joke.) The union is, in fact, split along its North-South axis over the euro and the devastating effect that economic union has had on the indebtedness of the Club Med countries. And it is split on its East-West axis by the consequences of mass migration, with some of the old Warsaw Pact states discovering that their new club has a penchant for issuing diktats too.
One of the more expeditious moves that the EU Commission has found it necessary to make is to drop the mandatory quotas of migrant settlement for those Eastern member states which were in open revolt. Even the ideologues in the Commission must occasionally give way to popular opinion, especially when it seems that failing to offer concessions might provoke the dreaded European spirit of nationalism. Which brings us to the heart of the matter. Nationalism is the monster that must be kept firmly locked in the cellar. There is, of course, sound historical justification for this, but the terrible crimes to which the febrile worship of nationhood gave rise in the last century have become bound up in an unreasoning fear of any sort of national identity or pride. What is worse is that this superstitious dread is breeding serious confusion about what is actually conducive to fascist demagoguery.
In his preposterously titled “state of the union address” – a term plagiarised from the democratically-elected United States presidency – Mr Juncker observed that it was splits in the union that “left space for galloping populism” and, he added, “we cannot accept that as populism doesn’t solve problems, on the contrary it creates problems”. This analysis is exactly the opposite of the truth. It is not the splits that have produced populism, it is populism (by which he means, public anger) that produced the splits. Differences of opinion and conflicting interests do not, in themselves, give rise to the kind of neo-fascist movements which are stalking the streets of once-liberal European capitals like Berlin, where the far Right (AfD) is likely today to get its first seats in the regional parliament since Germany’s reunification in 1990. It is the suppression of disagreement and difference that impels people into volatile extremism.
The divisions that are making a unified Europe impossible are being caused (or exacerbated) by the insistence on conformity to what the European project has decided are optimal attitudes: the demand, for example, that the countries of southern Europe adopt the financial rectitude and economic attitudes of Germany whose particular national tragedy in the last century was preceded by hyper-inflation. Or that the poorer Eastern bloc countries adopt the generous liberality of the richest countries of the West. Or that founder member states which, like France, were essential in forming the values of liberal democracy, accept a pan-European oligarchy which is deliberately designed to ignore the differences between political cultures.
When some future Gibbon comes to chronicle the decline and fall of this modern European empire, it will be clear enough what went wrong: they enforced uniformity instead of trying to understand difference, and in the end, they revived exactly the hateful forces they had hoped to extinguish.
Profile | Jean-Claude Juncker
DOB: 9 December 1954 (age 61)
Early years: Born and raised in a working-class family in Luxembourg’s more industrial south
Political career: Joined the centre-right Christian Social party the year he finished school, 1974, and got his first ministerial job in 1982. Was President of Luxembourg from 1995 to 2013, making him the longest serving head of any EU national government, and turned the country into a financial centre, but later came under scrutiny over the country’s tax avoidance policies.
European Politics: From 2004, Jean-Claude Juncker was the first President of Eurogroup and led the meetings of eurozone finance ministers firefighting the euro crisis. In 2014, he became President of the European Commission.
Controversy: Mr Juncker’s informal manner when meeting with EU leaders has been called into question by some, and he has also been forced to deny accusations that he has a drink problem.
“When it becomes serious, you have to lie”
Jean Claude Juncker, when accused of lying about crisis talks before the Greek bailout
RT ‘EU interferes in too many aspects of people’s lives,’ Juncker admits as Brexit vote looms European Commission head Jean-Claude Juncker has admitted that one of the reasons why Euroskepticism is currently on the rise is because “we were wrong … Continue reading
We are accustomed to looking at Europe’s woes in a purely financial context. This is a mistake, because it misses the real reasons why the EU will fail and not survive the next financial crisis.
We normally survive financial crises, thanks to the successful actions of central banks as lenders of last resort. However, the origins and construction of both the the euro and the EU itself could ensure the next financial crisis commences in the coming months, and will exceed the capabilities of the ECB to save the system.
It should be remembered that the European Union was originally a creation of US post-war foreign policy. The priority was to ensure there was a buffer against the march of Soviet communism, and to that end three elements of the policy towards Europe were established. First, there was the Marshall Plan, which from 1948 provided funds to help rebuild Europe’s infrastructure. This was followed by the establishment of NATO in 1949, which ensured American and British troops had permanent bases in Germany. And lastly, a CIA sponsored organisation, the American Committee on United Europe was established to covertly promote European political union.
It was therefore in no way a natural European development. But in the post-war years the concept of political union, initially the European Coal and Steel Community, became fact in the Treaty of Paris in 1951 with six founding members: France, West Germany, Belgium, Luxembourg and Italy. The ECSC evolved into the EU of today, with an additional twenty-one member states, not including the UK which has now decided to leave.
With the original founders retaining their national characteristics, the EU resembles a political portmanteau, a piece of assembled furniture, each component retaining its original characteristics. After sixty-five years, a Frenchman is still a staunch French nationalist. Germans are characteristically German, and the Italians remain delightfully Italian. Belgium is often referred to as a non-country, and is still riven between Walloons and the Flemish. As an organisation, the EU lacks national identity and therefore political cohesion.
This is why the European Commission in Brussels has to go to great lengths to assert itself. But it has an insurmountable problem, and that is it has no democratic authority. The EU parliament was set up to be toothless, which is why it fools only the ignorant. With power still residing in a small cabal of nation states, national powerbrokers pay little more than lip-service to the Brussels bureaucracy.
The relationship between national leaders and the European Commission has been deliberately long-term, in the sense that loss of sovereignty is used to gradually subordinate other EU members into the Franco-German line. The driving logic has been to make the European region a protected trade area in Franco-German joint interests, and to protect them from free markets. It was not easy to find the necessary compromise. Since the Second World War, France has been strongly protectionist over her own culture, insisting that the French only buy French goods. Germany’s success was rooted in savings, which encouraged industrial investment, leading to strong exports. These two nations with a common border had, and still have, very different values, but they managed to conceive and set up the European Central Bank and the euro. In Germany, the sound-money men in the Bundesbank lost out to industrial interests, which sought to profit from a weaker currency. This was actually in line with her political preferences, and it was the political class that controlled the relationship with France. In France the integrationists, politicians again, defeated the industrialists, who sought to insulate their home markets from German competition.
When a common currency was first mooted, two future problems were ignored. The first was how would the other states joining the euro adapt to the loss of their national currencies, and the second was how would the UK, with her Anglo-Saxon market-based culture adapt to a more European model. It wasn’t long before the latter issue was met head-on, with the withdrawal of sterling from the Exchange Rate Mechanism, the forerunner of the euro, in September 1992.
The euro was eventually born at the turn of the century. The Franco-German compromise led to the appointment of a Frenchman, Jean-Claude Trichet, as the ECB’s second president. All was well, because the abandonment of national currencies and the gradual acceptance of the euro meant that states in the Eurozone were able to borrow more cheaply in euros than they ever could in their own national currencies.
Bond risk was measured against German bunds, traditionally the lowest yielding bonds in Europe. It was not long before the spread between bunds and other Eurozone debt was commonly seen as a profitable opportunity, instead of a reflection of relative risk. European banks, insurance companies and pension funds all benefited from the substantial rise in the prices of bonds issued by peripheral EU members, and invested accordingly. In turn, these borrowers were only too willing to supply this demand by issuing enormous quantities of debt, in contravention of the Maastricht Treaty. Bank credit expanded as well, leaving the banking system highly geared.
The control mechanism for this explosion in borrowing was meant to be the Exchange Stability and Growth Pact, agreed in Maastricht in 1993. This laid down five rules, of which two concern us. Member states were bound to keep their national budget deficits to a maximum of 3% of GDP, and national government debt was limited to 60% of GDP. Neither Germany nor France qualified on the debt criteria, without rigging their national accounts, and the only reason that deficits came within the Pact was a mixture of dodgy accounting and fortuitous timing of the economic cycle. The control mechanism was never enforced.
So from the outset, no nation had any sense of responsibility towards the new currency. The rules were ignored and the euro became a gravy-chain for all member governments, spectacularly brought to public attention by the failure of Greece.
The Eurozone’s banking system, incorporating the national central banks and the ECB, bound together in a bizarre settlement system called TARGET, became the means for member nations to buy German goods on credit. Very good for Germany, you may say, but the problem was that the credit was supplied by Germany herself. It is the same as lending money to the buyer of your business in a rigged transaction. This flaw in the system’s construction is now a rumbling volcano ready to blow at any moment.
The Germans want their money back, or at least don’t want to write it off. The debtors cannot pay, and need to borrow more money just to survive. Neither side wishes to face reality. It started with Ireland, then Cyprus, followed by Greece and Portugal. These are the smaller creditors, which Germany, led by its Finance Minister Wolfgang Schäuble, managed to crush into debtor submission and are now economic zombies. The real problem comes with Italy, which is also failing and has a debt-to-GDP ratio estimated to be over 133% and rising. If Italy goes, it will be followed by Spain and France. Herr Schäuble cannot force these major creditors into line so easily, because at this stage the whole Eurozone banking system will be in deep trouble, as will the German government itself. German savers are also becoming acutely aware that they will pick up the bill.
The first line of defence, as always, will be for the ECB as lender of last resort to keep the banks afloat. The only way it can do this is to accelerate the printing of euros and to monopolise Eurozone debt markets. Whether or not the ECB can hold the currency with all these liabilities on board its own balance sheet, and for how long, remains to be seen.
For the moment, the euro stands there like a Goliath, seemingly invincible. It represents the anti-free-market European establishment, which no one has dared to challenge. This surely is the underlying reason the ECB can impose negative interest rates and get away with it. But serious cracks are appearing. First we had Brexit, likely to be followed by other small states wanting out. The Italian banking crisis is almost certain to come to a head soon, and an Italian referendum on the constitution next month is also an important hurdle to be overcome. The politicians are in panic mode, reassuring everyone there is nothing wrong more integration and a new army won’t cure.
The market effect, besides being a severe shock to all markets, is likely to be two-fold. Firstly, international flows will sell down the euro in favour of the dollar. Given the euro’s weighting in the dollar index, this will be a major disruption for all currency markets. Secondly, Eurozone residents with bank deposits are likely to increasingly seek refuge in physical gold, as signs of their currency’s impending collapse emerge, because there is nowhere else for them to go.
Whichever way one looks at it, it is increasingly difficult to accept any other outcome than a complete collapse of this ill-found political construction, originally promoted in US interests by a CIA-sponsored organisation. The euro, being dependant on political cohesion instead of original market demand, will simply cease to be money, somewhat rapidly.
Cash will crash the bank$ter$ and they have their BIG central bank brother to thank for…
Big problem for EU banks – they have just too much cash
FRANKFURT, 30 Aug 2016:
In the strange days of negative interest rates, having €1 trillion more than you need can be a drag.
But that’s precisely how much eurozone banks will soon have parked at the European Central Bank (ECB), even though they must pay a punitive charge that is eating deep into their profits and forcing lenders to throw out old business models.
The charge on excess cash was introduced by the ECB in 2014 to force banks to stop hoarding cash and lend more, so boosting growth and inflation.
But most of that ever-growing cash pile comes from the ECB itself, which is printing €80 billion a month to lower borrowing costs.
The new cash ultimately ends up in somebody’s bank account – so it is effectively trapped in the banking system, contributing to excess liquidity.
The negative deposit rate already cost banks €2.6 billion since 2014, according to Reuters calculations using ECB data.
Lenders’ reluctance to pass on the charge to depositors means their margins are shrinking, raising concern about their ability to cope with future shocks.
“Banks cannot fully offset this by cutting remuneration for depositors so their margins have suffered,” Marco Troiano, a director at Scope Ratings, said. “They need to cut costs and impose fees – both of which may cost them customers.”
Some lenders have already started to charge for basic services in markets where such fees were once taboo. Germany’s Postbank, a unit of Deutsche Bank, recently scrapped free current accounts for millions of customers.
“I think it is right that banks are discussing current account fees,” Bundesbank director Andreas Dombret said in an interview. “Banking services cannot be free if banks earn no interest margin.”
Several European lenders already charge corporate clients a percentage for large deposits and a small cooperative bank in the Bavarian Alps has introduced fees for wealthy retail customers.
Yet even more drastic measures could lie ahead if deposit rates stay at current or even more negative levels.
Economists have started to wonder at what point banks would simply start to hoard physical cash to avoid the penalty rate. Some Bank of England studies put this pain threshold at minus 0.5%, just 10 basis points below the ECB’s deposit rate.
When the ECB unveiled plans earlier this year to retire the €500 note, there was a public outcry in Germany, where many people saw the move as an attack on their ability to keep their savings in cash.
German and French banks hold two-thirds of excess liquidity, according to a Deutsche Bank analysis, while Italian and Spanish banks hardly have any excess reserves.
Economists have formulated several hypotheses to explain this pattern. They cite Germany’s strong exports to other eurozone countries, the prominence of French and German banks as financial brokers and both countries’ status as relatively safe places to park one’s money within the bloc.
Ultimately, most explanations revolve around the two countries’ superior economic health compared with their eurozone peers.
This acts as a magnet for cash and, combined with negative returns on much bank-to-bank lending, contributes to keeping it locked in the coffers of those firms at painfully high costs.
- Welcome to the Weird World of Negative Interest Rates
- NIRP: A Tax in Sheep’s Clothing
- German savers lose faith in banks, stash cash at home: one more sign of impending financial calamity