MNI POLICY: ECB Not Discussed Rates Drag On Banks: De Guindos

by Jason Webb

     LONDON (MNI) - The European Central Bank has not discussed the effects of

negative interest rates on bank profitability at the level of the Governing

Council or board, ECB Vice-President Luis de Guindos said on Wednesday, adding

that the main drag on banking profits came from structural factors such as

excess capacity and cost inefficiency.

     Here are main points of a speech and question-and-answer session by De

Guindos at an OMFIF event in London:

     --"We have not had any discussion in the board or the Governing Council

about the side effects of negative interest rates," De Guindos said, in response

to a question referring to comments by President Mario Draghi which prompted

speculation the ECB could tier its deposit rate. Overall, the positive effects

of negative interest rates on banking profits, via stimulating the economy,

outweigh the negative impact on net interest margins, De Guindos said.

     --Low banking profits represent a threat to financial stability and impede

the efficient transmission of monetary policy.

     --Banking profits are depressed more by structural factors such as excess

capacity, insufficient IT investment, and the additional cost of post-crisis

regulatory reforms. Eurozone banks would benefit from consolidation both within

individual eurozone countries and across borders, De Guindos said, although he

added that he did not want to see the creation of national champions. Some

countries, such as France and Spain, have already seen consolidation, but this

is not the case elsewhere, he said.

     --Key to cross-border consolidation will be the implementation of a

eurozone-wide deposit insurance scheme. This would reduce the need for

individual countries to insist their banks are more highly capitalised than

might be necessary if resolution costs were shared throughout the currency bloc.

     --The ECB has not discussed any changes to its definition of price

stability, but historically low interest rates will persist even after policy

normalisation. Meanwhile, Europe has space for fiscal stimulus.

     --Responding to a question, de Guindos noted that Tuesday's eurozone data

was "the first positive surprise...after a number of negative surprises, since

the beginning of 2019". Growth across the bloc came in slightly above

expectations, with GDP up 0.4% q/q versus a rise of just 0.2% in Q4 2018, the

latest Eurostat release showed. Some national inflation data also came in

stronger than expectations, with German April harmonised inflation up 2.1% y/y

vs 1.4% in March.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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