Zero Interest

The ECB's Dilemma

Keeping it real at the ECB?
  • Why it matters

    Why it matters

    The ECB faces a potential conflict of interest. Its monetary policy could drive many of the banks it supervises into the ground, the author argues.

  • Facts


    • The European Central Bank’s goal is to push still negative inflation in the 19-nation euro zone up to close to 2 percent, a target that it hasn’t met in over three years.
    • The ECB has pushed its benchmark interest rates to zero in a bid to boost bank lending and increase inflation.
    • Banks complain that interest-rate margins are so low that they can no longer earn a profit from lending out cash.
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Long before central supervision of the 120 most important banks in the euro zone was placed under the umbrella of the European Central Bank, experts had warned that a central bank would quickly face conflicting goals if it had to simultaneously guarantee price levels and financial market stability.

Critics argued that a central bank could easily be tempted to refrain from raising interest rates, even if it made sense in terms of monetary policy, to avoid causing problems for individual banks. And that its reputation as the supreme financial regulator would suffer as a result.

And while many things have defied these predictions, that hasn’t been the case on all fronts.

At the moment, no one is talking about interest-rate increases in the euro zone. Instead, the ECB’s zero-interest rate policy, combined with negative interest on deposits banks park with the ECB, is increasingly weighing on the margin of interest and, therefore, the earnings of commercial banks.

But let us not forget that a profitability crisis can quickly turn into a solvency crisis.

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