The European Central Bank (ECB) began charging banks interest on deposits in June 2014 to encourage them to lend more to companies and consumers. It hasnâ€™t worked.
Deposits at the ECB by euro-area banks in excess of required reserves have jumped six-fold since the introduction of negative interest rates, while lending within the currency bloc has barely budged. Of the 646 billion euros ($730 billion) that banks added in assets during the period, about 85 percent has ended up as deposits at the central bank.
One reason banks are paying to keep money idle is a lack of demand for loans in an economy still recovering from a double-dip recession and a sovereign-debt crisis. Another is that banks saddled with bad loans or low capital levels and those in the midst of restructuring are reluctant to increase lending. Even the ECBâ€™s latest offer to pay banks interest on money they borrow from the central bank may not do the trick.
â€œTheyâ€™re not profitable enough to substantially increase lending, so even the negative rate for lending by the ECB to the banks probably wonâ€™t help much,â€ said Jan Schildbach, head of research for banking and financial markets at Deutsche Bank AG in Frankfurt. â€œItâ€™s not lack of liquidity or its price thatâ€™s the problem.â€
Lending to nonfinancial companies and consumers, excluding mortgages, has been stuck at about 6.8 trillion euros since June 2014, ECB data show, despite the central bankâ€™s liquidity programs to encourage more of those loans.
Policy makers have looked at those figures when determining how much cheap money to provide lenders. Banks that increase such loans qualify for more funds.
When it went deeper into minus territory on March 10, the ECB said it would use similar criteria to determine if a bank qualifies for negative rates on money it borrows from the central bank.
That means the ECB is now willing to pay banks to borrow at the same rate it charges for excess deposits they hold there. And itâ€™s willing to do so even if a bank isnâ€™t increasing lending, as long as the firm is reducing lending at a slower rate than in the previous 12 months.
â€œIt looks like the ECB is just trying to stop the bleeding,â€ said Silvia Merler, a fellow at Bruegel, an economic research group in Brussels. â€œTheyâ€™ve basically done that with the previous liquidity programs too. They havenâ€™t managed to encourage more lending, but at least stopped the erosion that was going on.â€
Lending within the euro area to nonfinancial firms and consumers, excluding mortgages, had declined by 627 billion euros, or 8.5 percent, from June 2012 through May 2014.
While negative rates help European companies and consumers lower
borrowing costs, they are also squeezing banksâ€™ profit margins. Thatâ€™s because the interest banks pay savers, which track ECB short-term rates, typically canâ€™t go negative for fear that retail depositors will withdraw their money and keep it in cash at home.
When loan rates keep falling and deposit rates are stuck at zero, the spread between what the bank charges for loans and what it pays for savings continues to shrink.
â€œOne of the reasons for the poor performance of the banks is the crimping of their margins due to negative rates,â€ said Alastair George, investment strategist at Edison Investment Research in London. â€œIf banks arenâ€™t healthy enough to make more loans because they canâ€™t make money, how can the rates be effective in boosting lending?â€