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German bank lobby group calls for tiered ECB deposit rate

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German bank lobby group calls for tiered ECB deposit rate
FILE PHOTO: Sign of the European central Bank (ECB) is seen ahead of the news conference on the outcome of the Governing Council meeting, outside the ECB headquarters in Frankfurt, Germany, March 7, 2019. REUTERS/Kai Pfaffenbach   -   Copyright  KAI PFAFFENBACH(Reuters)
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FRANKFURT (Reuters) – Germany’s bank lobby group BdB has urged the European Central Bank to lower the charge that banks pay on some of their excess cash by introducing a tiered deposit rate.

“If the ECB is unable to end the era of negative interest rates this year, then it should at least take the central banks in Switzerland and Japan as a model,” said BdB president Hans-Walter Peters in remarks prepared for a Monday press conference.

Interest rates in Japan and Switzerland are also negative, but banks are exempted from paying the central banks for parking cash up to a certain volume.

“The allowance must come now,” Peters said.

ECB policymakers debated the risk that ultra-low interest rates pose to banks at their March meeting.

Fearing a sharp slowdown in economic growth, the ECB last month delayed a planned interest rate hike until 2020 and gave banks fresh access to ultra-cheap funding.

The delay indicates that rates will stay negative for even longer and banks will continue to pay hefty fees to the ECB for parking their excess cash, a concern for policymakers as lenders transmit monetary policy to the real economy.

Sources close to the discussion said that ECB staff were studying a tiered deposit rate as a way to give banks relief from the punitive charge on at least part of their excess reserves.

It would exempt banks from paying the ECB’s 0.40 percent annual charge on part of their excess reserves, boosting their profits as they struggle with an unexpected economic slowdown.

However, introducing a tiered rate could signal to markets that rates are going to stay low for a very long time, in potential conflict with the ECB’s forward guidance, which sees rates at record lows only until next year.

While large banks such as Deutsche Bank, Commerzbank, BNP Paribas or SocGen would benefit from a tiered approach, many medium-sized and small lenders or southern European banks are unlikely to gain much, analysts have said.

Germany’s banks are plagued by low profitability in a competitive market, and Deutsche Bank and Commerzbank have started merger talks to achieve economies of scale and cut costs.

“Profitable banks are not a nice-to-have but a must-have for a large and export-oriented economy like the German economy,” BdB’s Peter said.

(Reporting by Arno Schuetze; Editing by Riham Alkousaa and Kevin Liffey)

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