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Capital Markets

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Categorized | Banks, Economy

Draghi blames low profits on surfeit of banks

Posted on September 22, 2016

President of the European Central Bank Mario Draghi speaks during a news conference in Frankfurt, Germany, Thursday, Sept. 8, 2016, following a meeting of the ECB governing council. (AP Photo/Michael Probst)©AP

ECB president Mario Draghi

Mario Draghi has hit back at bankers critical of the European Central Bank’s ultra-low interest rates, saying an excess of eurozone lenders is to blame for their weak profitability, not monetary policy.

Banks have been lashing out at the ECB over its decision to impose negative rates on the sector, which lenders have on the whole not passed on to their customers.

    While they say the central bank’s shift below zero is squeezing their margins, the ECB’s president countered on Thursday that the high number of banks in the eurozone was a factor in the weak profitability of the currency bloc’s lenders.

    “Low interest rates tend to squeeze net interest margins owing to downward rigidity in banks’ deposit rates. But over-banking is also a factor in the current low level of bank profitability,” Mr Draghi said.

    The ECB’s deposit rate is minus 0.4 per cent — meaning the central bank imposes a levy of the same amount on a portion of reserves parked there by lenders.

    German lenders have been among the central bank’s fiercest critics, with the country’s powerful financial lobby adding to the pressure the ECB is also facing from the political establishment in the eurozone’s largest economy.

    German citizens are particularly aggrieved that low and negative rates eat into their considerable savings.

    The central bank is adamant that it can lower rates again should economic conditions worsen, though analysts believe further cuts look unlikely in the coming months as the eurozone’s recovery remains on stable footing.

    There are 5,192 credit institutions in the euro area, according to ECB statistics.

    Overcapacity can result in elevated costs for banks because when there are many lenders in a given market it is more difficult for them to pass on costs to their customers.

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    Speaking at a conference of the European Systemic Risk Board in Frankfurt, the ECB president pointed to a report noting that the banking sector had “outgrown capital markets”, which are smaller in the eurozone than in other large advanced economies. The ratio of bank assets to private equity and bond market capitalisation had jumped from less than two around the time the single currency was introduced to four by 2008.

    The problem with such heavy reliance on bank lending, he argued, tended to exacerbate financial systems’ booms and busts, with banks being particularly slow to restart lending after a crisis. “In the aftermath of a financial crisis economic growth in countries with bank-based systems lags behind that of countries with more balanced financial systems,” Mr Draghi said.

    The eurozone’s capital markets, in which firms can raise money by issuing bonds and equities, are much smaller than those in the US. That is one factor that the ECB believes is impeding the effectiveness of its quantitative easing policy, in which it buys corporate and government bonds in an attempt to boost inflation.