20 July 2017

Michael Kemmer on ECB: introduce threshold, curb side effects of negative interest rates

“I would have liked the European Central Bank (ECB) to take another baby step today, at least a verbal one, towards exiting its extremely expansive monetary policy,” said a disappointed Michael Kemmer, general manager of the Association of German Banks. “The eurozone economy is in good shape and the deflation fears once voiced have long since evaporated,” Mr Kemmer added.

After the summer break, the ECB Governing Council would decide on any reduction of its asset purchase programme from next year. “But, from today’s perspective, no change in the key interest rates is likely until well into 2018,” Mr Kemmer regretted. For this reason, the Association of German Banks reiterated its proposal to reduce the unwanted side effects of the negative interest rate policy by introducing a threshold below which banks would not have to pay any penalty for depositing their excess liquidity with the ECB.

The objection that such a threshold would lead banks to cut back their lending and keep more excess liquidity was not plausible, Mr Kemmer said. “At present, the development of lending in the eurozone is being checked by the demand side and the weak solvency of some borrowers. Most eurozone banks would very much like to provide more loans even without negative interest rates.” With a threshold, the present “special tax” on banks in the eurozone would be abolished. Banks would be better able to strengthen their balance sheets. “Dropping the special tax in the form of negative deposit rates would most certainly contribute positively to financial stability and is in principle long overdue,” Mr Kemmer concluded.


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