Mario Draghi

The Lonely Central Banker

draghi ralph orlowski reuters
ECB President Mario Draghi's negative-interest policies are beginning to squeeze the profits of eurozone banks, and many bankers in Germany are starting to call for him to change course.
  • Why it matters

    Why it matters

    Rising criticism of Mario Draghi’s negative rate monetary policies could eventually force a leadership crisis in the European Central Bank, should other member countries no longer benefit from the loose money regime.

  • Facts

    Facts

    • At a banking summit in Frankfurt sponsored by Handelsblatt on Wednesday, leading German bankers took aim at ECB monetary policy, saying it was not helping stabilize the zone’s economy.
    • A French central banker defended the central bank’s prescriptions, saying they had prevented event more violent disruption in the 19-nation zone, including deflation.
    • One Swiss banker predicted the turning point could come in 2025, when Euribor European rates now anticipate the ECB’s core lending rate will finally climb above 1 percent.
  • Audio

    Audio

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It’s pretty rare when the chief executive of Deutsche Bank, Germany’s largest bank, and the head of the country’s savings bank association agree on anything. Usually, the two have polar opposite interests when it comes to policy or regulation of their industry.

But on Wednesday, John Cryan, the Deutsche Bank chief executive, and Georg Fahrenschon, head of the German Association of Savings Banks, agreed at Handelsblatt’s banking summit in Frankfurt: The European Central Bank’s negative interest policies and quantitative easing are hurting the euro zone’s economy, not helping it.

Of course, Mr. Draghi’s decision to prop up the economies and the banking sectors in the 19 countries that use the euro with rock-bottom rates and massive purchases of securities is the same formula pursued by the U.S. Federal Reserve in the wake of the 2008 financial crisis.

But unlike in the United States, where a prolonged self-induced monetary coma made possible through cheap money has led to signs of a burgeoning turnaround, the situation is not as rosy in Europe, where euro zone economies in the south, such as Italy, Spain, Portugal and certainly Greece, are no where close to finding traction eight years after the global financial cataclysm.

At the Handelsblatt summit in the German financial capital, Mr. Fahrenschon, the president of the German Savings Bank Association, accused Mr. Draghi of steering Europe towards the next financial crisis. If Mr. Draghi doesn’t change his ways, banks will not “build up massive capital in order to increase stability,” he said.

Stability is also the main goal of the ECB. But in the German banking sector, there is disagreement over the right path to a stable economy. Of course, Mr. Fahrenschon and his peers in the banking industry also have a self-interest in the change. Mr. Draghi’s policies demanding that banks set aside greater reserves is costing them money, and profits.

Nearly a decade after the global financial crisis, the banking industry in Europe is showing signs of strain. New regulations, negative interest rates and the ECB’s tougher reserve requirements are forcing many banks to pass along their own pain and costs to their consumers, or if they can’t, to eat the cost themselves.

Most tried to avoid burdening their clients, but after eight years, many are being forced to share their misery. Several banks, penalized for their cash reserves by negative ECB rates, have started charging their own valued customers for their deposits.

The customers are unhappy, no surprise, and are beginning to go elsewhere with the money.

German savings banks, called “Sparkassen,” have been reluctant to penalize their clients. The state-supported institutions are not under the same kind of profit pressure as their private banking rivals such as Deutsche Bank.

The community-based savings banks are a fixture in Germany, and a major lender to the country’s small- and medium-sized business community, the so-called Mittelstand, which powers the bulk of the German economy.

The savings banks reject any responsibility for the financial crisis and see themselves as innocent victims of the current ECB policies.

But the little banks are not alone. Mr. Cryan, the most powerful banker in Germany, a native of northern England, agrees that the ECB’s prescription for economic recovery is having unintended, negative side effects.

“The monetary policy works against its own goals to strengthen the economy and stabilize the European banking system,” Mr. Cryan said at the banking summit.

The ECB’s ongoing policies, by saddling banks with new costs, will eventually force banks to raise their own interest rates on consumers and businesses. Companies will then withhold investment amid the costs and the ongoing uncertainty, he said.

Theodor Weimer, the chief executive of Munich-based HypoVereinsbank, the German subsidiary of Italy’s UniCredit Bank, acknowledged that the ECB was forced to take drastic measures to stabilize the financial system in Europe following the financial crisis.

“But it has to be brave enough to reverse a decision that once used to be correct,” Mr. Weimer said at the banking summit.

That won’t be easy, said Francois Villeroy de Galhau, the head of the Bank of France and a member of the ECB’s governing board, which votes on rate policy, who was also a guest at the banking summit.

“I know that there are lively discussions in Germany about the money policy in the euro single currency area,” Mr. Galhau said. “But we have to secure price stability.”

The central bankers are caught in a conflict of interest.

On the one hand, they want commercial banks to be profitable. On the other, they are responsible for the financial stability of the eurozone. That creates friction.

“Easy money is lowering the net interest margins of banks,” Mr. Galhau, the French central banker, said. But he also stressed the positive effects the policies have had for banks.

“Credit volumes have gone up,” he pointed out.

The ECB has tried to dampen the rising criticism with several studies of its own.

One, generated by Germany’s Bundesbank, showed that the ECB’s policies were making a substantial contribution to economic growth and holding down inflation. The study was noteworthy because it came from the Bundesbank, whose president, Jens Weidmann, has been a persistent critic of Mr. Draghi’s moves.

According to the French center banker, Mr. Galhau, ECB monetary policy is not to blame for the current negative interest rate environment. The culprit is a lack of a willingness by consumers and businesses to invest, and by banks to lend.  by consumers and by banks. Low interest rather would point to lacking investment concerning savings.

He suggested a “funding and investment union,” to spur demand.

The ECB wants to strengthen ties in Europe’s financial and banking sectors across national borders. The new uniform regulations are supposed to consolidate banks across the continent, and take advantage of the sector’s size and depth, breaking down national barriers.

“We must find a solution for the economic imbalance in Europe,” Mr. Galhau said.

The ECB has repeatedly been accused by German bankers and politicians of favoring the interests of Southern European euro countries, which need cheap money to support their dormant economies amid the aftershock of the financial and banking crises.

But it doesn’t seem likely that the ECB will change its ways — for bankers in Germany or anywhere else.

Mr. Weimer, the Hypovereinsbank chief executive, said 2025 could be a tipping point for interest rates. In that year, markets expect the Euribor European reference rates to finally climb back over 1 percent. But even that isn’t guaranteed.

“There are always geopolitical uncertainties,” Mr. Weimer told the banking summit. “So I don’t think we will be spared from major transformations between now and 2025.”

The refugee crisis in Europe an impluse on one anticipated four years ago, for example.

Banks are beginning to bridle at the ongoing ECB regulation. Refinancing must be carried out regardless of performance or rating. But punitive rates for parking money at the ECB are inordinately punishing large commercial banks like HypoVereinsbank.

“It’s wrongful distortion of competition,” Mr. Weimer said. Even amid negative interest rates, many are still stockpiling money at banks. “That is per se a critical situation,” he said.

The Deutsche Bank chief executive, Mr. Cryan, said he was concerned about the safety of banking customers savings. In Germany, consumers are conservative and tend to put excess cash into bank accounts rather than invest. Even low interest rates have not led to a widespread movement of capital into the stock markets, he said, which many still perceive to be unsafe.

But even that argument hasn’t swayed the ECB from changing its course. The ultra-easy money policy prevented an even more dangerous downward spiral of prices, they argue.

Urs Rohner, chairman of Credit Suisse and another guest at the summit, said he was skeptical of the ECB’s argument. “You can only generate economic growth via monetary policy up to a certain point,” Mr. Rohner said. After that, fiscal policy will be more likely to succeed.

But there are few signs that rising criticism from Europe’s banking sector will persuade the ECB to change its ways any time soon. “Our policy,” said Mr. Galhau, the French central banker, “is in service of the national economies.”

 

Frank Drost and Jan Mallien are editors at Handelsblatt who write about finance and banking. To reach them: drost@handelsblatt.com and mallien@handelsblatt.com

 

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