FRANKFURT (Reuters) – The European Central Bank’s negative deposit rate has so far had a neutral impact on bank profitability, ECB President Mario Draghi said on Friday, underpinning a recent decision not to compensate lenders for super low rates.
But Draghi added that the impact of negative rates changes over time so the ECB would continue to monitor bank profitability, suggesting that compensation for banks is not fully off the table.
Lenders often complain that negative rates compress their margins, inhibiting their ability to lend and negating the very stimulus the ECB is hoping to achieve.
A possible solution, briefly discussed by policymakers earlier this month, could be a multi-tier deposit rate, which would exempt part of banks’ excess reserves from the ECB’s 0.4% charge.
“The overall effect of our monetary policy on bank profitability has so far been broadly neutral,” Draghi said in a letter to a member of the European Parliament on Friday.
“The negative impact on banks’ net interest margins has been offset by an improvement in the economic outlook that has led to an increase in the total volume of loans and, moreover, improved credit quality, which has reduced provisioning costs,” he added.
While a tiered deposit rate has been considered several times already, policymakers said that there is little enthusiasm for such a complex scheme right now.
Still, they said that the discussion could be reopened later, especially since ECB rates are expected to stay low for even longer, potentially exacerbating the negative side effects.
“The ECB carefully monitors the overall effects of negative rates on the banking sector, in particular as the balance of their effects depends on the length of their application,” Draghi added.
(Reporting by Balazs Koranyi; Editing by Mark Heinrich)