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 Indeed, the banking sector's pain will only get bigger if the ECB
cuts its deposit rate to -0.4 percent from -0.3 percent on March 10,
then possibly to -0.5 percent by the end of the year, as financial
markets expect.
Such negative rates are effectively a charge on banks to park their
cash at the ECB. They are designed to spur lending into the economy,
which is confronted with a new slowdown in global growth and
evaporating inflation.
But bank margins on loans have already been shrinking and lenders,
particularly in cash-rich countries such as Germany, are complaining
that the ECB's charges are eating into their profits.
The clearest signal yet that the ECB is listening came from Vice
President Vitor Constancio last week when he said the effects of
further policy easing on banks would have to be mitigated, as
central banks did in Switzerland and Japan.
The ECB is working on a number of ideas for a multi-tier deposit
rate, several sources with direct knowledge told Reuters, but it is
not clear if any of those would be discussed at the next Governing
Council meeting.
Multi-level deposit rates were already being discussed in December
but did not make it into any final proposals and policymakers at the
time called the idea too exotic.
In Switzerland, a -0.75 percent rate is only applied on deposits
that exceed banks' minimum reserves by 20 times. In Japan, it is
charged only above required reserves and money supplied as part of
the Bank of Japan's lending programmers.
This means that banks are not charged on some deposits.
The ECB could simply implement a two-tier system, charging a bigger
penalty rate on deposits over a certain multiple of mandatory
reserves, much like in Switzerland.
"This would protect banks from the negative depo rate and give the
ECB room to be more aggressive with further rate cuts," Giuseppe
Maraffino, a rate strategist at Barclays in London said.
Maraffino said the ECB could also exempt from the penalty rate any
cash borrowed using its TLTRO targeted loan facility, which has to
be used to lend to the real economy.
An alternative approach would be to increase banks' reserve
requirements, which are remunerated at the ECB's refinancing rate,
currently at 0.05 percent.
It would be a boon for banks that already have deposits well in
excess of those reserves, typically in Germany, the Netherlands and
France, with the added benefit that the ECB could maintain its
current interest rate framework.
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But it would be a difficulty for cash-strapped lenders in countries
such as Greece, where capital controls have been in place since
June.
NO RUSH?
The ECB can afford to wait as the fallout on banks from the negative
deposit rate is limited so far. ECB supervisors also say banks need
to adapt their businesses to the low rates, cutting costs and
focusing more on fees and less on interest income.
ECB President Mario Draghi has also played down expectations, saying
it was not the central bank's mandate to protect banks'
profitability.
Banks are currently depositing 639 billion euros ($701.75 billion)
at the ECB apart from their obligatory reserves.
If this level of excess liquidity were to remain stable for a year,
it would cost depositing banks a total 1.9 billion euros based on
the ECB's current -0.30 basis point deposit rate.
But excess liquidity has been growing at a pace of nearly 50 billion
euros per month since the ECB expanded its asset-buying program a
year ago and is expected to reach around 1.2 trillion euros by March
2017, meaning banks will likely foot a much larger bill.
The prospect of meager profits has also been cited as one of the
reasons behind a sharp selloff in euro zone banking shares since the
beginning of the year.
($1 = 0.9106 euros)
(Editing by Jeremy Gaunt.)
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