ECB to adopt extra caution with regards to any further deposit rate cut - Rabobank

Research Team at Rabobank, suggests that the current low level of the ECB’s policy rate and the flatness of the yield curve are more of a threat to bank profitability in the medium-term than they are in the short-term (although they are already having an impact).

Key Quotes

“In addition President Draghi and the IMF have emphasised that there are many issues that are impacting bank profitability other than rates and it is these that need to be addressed. These issues include dealing with the elevated levels of non-performing loans, enhancing efficiency and reducing excess capacity in the industry.

In the week prior, the Dutch national bank’s Klaas Knot presented the Netherland’s latest ‘Overview of Financial Stability’. He noted that low interest rates are causing problems for bank profitability and these banks need to look for other ways to make profits. The fact that the ECB is advising banks to restructure their business and to look for alternative sources of profit makes it clear that the onus at the present time is upon banks themselves to compensate for low rates. Therefore we draw the conclusion that, for the foreseeable future, the ECB will not see bank profitability concerns as providing a reason to halt or scale back its use of a negative marginal policy rate and QE bond purchases. However, we would expect the ECB to adopt extra caution with regards to any further deposit rate cut.”