Frontpage News 2016 European banks hit...

European banks hit by negative interest rates

19 April 2016

The European Central Bank has kept interest rates negative for almost two years. This has positive effects in the form of cheaper loans, but it also hits bank revenue, according to the Danish Bankers Association.
New figures from the ECB show that 81 percent of banks in the Eurozone have experienced a decline in their net interest income in the last half year as a result of the ECB’s monetary policy concerning negative deposit rates.

Advantages and disadvantages

The banks expect the development of decreasing revenue in banks to continue for the next six months.
“Lower interest rates have contributed to slightly higher lending, but this is not resulting in higher revenue, as the difference between lending rates and deposit rates is simultaneously being narrowed,” the Chief Economist at the Danish Bankers Association, Niels Storm Stenbæk says.
27 percent of banks in the Eurozone have experienced a decrease in interest rate margins on commercial loans. 21 percent of banks have also experienced a decrease in interest rate margins on consumer loans and other household loans.
Figure: the effect of the ECB’s monetary policy on negative deposit rates 
Source: ECB ”The euro area bank lending survey – Q1 2016”
The lower interest rates are also an advantage for banks, the Danish Bankers Association highlights:
“The lower interest rates mean lower financing costs. At the same time, losses decrease when customers find paying interest easier,” Niels Storm Stenbæk states and continues:
“In some countries, including Denmark, revenue has also been accumulated as a result of exchange rate hedging and refinancing mortgages.”

The bottom line suffers

However, calculations show that the bottom line in banks suffers with negative interest rates. The BIS and the Danish Bankers Association have shown that larger international and Danish banks loose approximately 0.3-0.4 percentage points of the result, seen in relation to the overall assets, when short interest rates are low and fall by 1 percentage point.
“Although both advantages and disadvantages are connected to lower interest rates, at the end of the day it means that the bottom line in banks suffers,” Niels Storm Stenbæk concludes.
Further information:
Stine Luise Hansen, Head of Media Relations at the Danish Bankers Association
Tel.: +45 3016 1009
E-mail: [email protected]
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