Deposit Levy

ECB Fees Prove Costly For Banks, Savers

The European Central Bank – its Frankfurt headquarters in the foreground – is increasingly hurting Germany's banks.
  • Why it matters

    Why it matters

    Negative interest rates are challenging the business model of Germany’s savings banks and credit unions.

  • Facts


    • The ECB on Thursday slashed its rate on bank deposits from -0.2 to -0.3 percent and extended its bond-buying program by six months.
    • German banks are anticipating a loss of €1.4 billion annually from the hike in punitive rates on deposits.
    • German banks right now are flush with cash due to cheap money and a low demand for loans.
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For German banks, doing business just got a lot more expensive.

The European Central Bank last week doubled down on a decision to charge banks in the euro zone a fee – rather than pay them interest – on overnight deposits they park at the Frankfurt-based institution, as it sought to boost lending and stimulate economic growth in the 19-nation bloc.

The ECB is the only central bank in the world to go negative, and it’s proving a risky experiment. In Germany, it’s hitting banks where it hurts – their profits.

The central bank’s decision to slash interest rates on overnight deposits by another 10 basis points last week to -0.3 percent will cost German banks €1.4 billion ($1.5 billion) annually, equivalent to seven percent of their pretax earnings in 2014.

The consulting firm Barkow Consulting calculated those figures for Handelsblatt.

ECB President Mario Draghi announced the decision to hike the punitive deposit rate on Thursday, though it left its principal lending rate, the main refinancing rate, at 0.05 percent. The ECB’s bond-buying program, with a volume of €60 billion a month, was also extended by half a year, bringing the “quantitative easing” program to a total of €1.5 trillion.

Through the latest injection of cheap money into the market, Mr. Draghi aims to increase inflation in the euro zone to just below two percent, the figure that central bankers believe best promotes economic stability and predictability over the long-term. The currency bloc’s annual inflation rate stood at just 0.1 per cent in November, and the core rate of inflation, which excludes volatile food energy prices, was at 0.9 percent.

Many experts, however, are skeptical of the ECB’s program. Hans-Peter Burghof, a professor of banking and finance, believes the central bank’s decision to double down on negative interest rates will have drastic consequences for Germany’s already pinched savings banks and credit unions.

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