“Negative rates are just one factor among many” Interview published in “Handelsblatt”

13.05.2019 | Sabine Mauderer DE

Interview with Sabine Mauderer conducted by Jan Mallien and Frank Wiebe.

Sabine Mauderer, are credit institutions right to criticise the negative rates which the ECB is charging them?

Banks paid €7.5 billion in interest last year to deposit money with the Eurosystem, but they earned a net €350 million in interest income. Not just that: many banks, particularly those in Germany, are burdened with high cost/income ratios. So negative rates are just one factor among many here.

But wouldn't it be a good idea to give banks some relief by introducing a tiering system – a mechanism where negative rates are only charged above a certain exemption limit?

I wouldn’t make too much of that kind of relief. What's more crucial is the persistent, very low level of interest rates overall – this proved to be a boon for bank balance sheets initially, for instance because it drove up valuations of banks’ securities holdings and lowered default risk. However, when interest rates stay low for a very long time, it's likely that the downside factors will increasingly come into play. You see, there is a de facto zero lower bound for rates on deposits, and banks are no longer generating quite as much income from their loans. This is intensifying the pressure on the interest margin.

What signal would a tiering system send to markets?

That’s the kind of topic we discuss in a Eurosystem context. Under no circumstances should the impression arise that it locks in an extended spell of low interest rates or opens the door to further interest rate cuts.

The ECB has to make a monetary policy case for every measure it takes. Are there any signs that lending is faltering at banks that would benefit from a tiering system?

There is no indication at present of a drop in the supply of credit to enterprises and households. But that’s something we have to continue monitoring over time at the Eurosystem level, of course.

It has often been said that a tiered deposit facility rate would mainly help out German and French credit institutions because of the huge volumes of excess liquidity they have on their books.

We always need to look at the euro area in its entirety. Who would benefit from a tiering system would mainly be determined by how that system is designed – i.e. what a possible exemption limit would depend on, for instance.

Could you give us an example?

One solution might be to link the exemption limits to private sector deposits via the minimum reserves. This approach would be particularly good for banks in the euro area that run traditional deposit-taking business. But we have not yet discussed such details at length. Nor has it been established whether there is even a monetary policy case for introducing a tiering system.

One decision that has been made, though, is to launch a fresh round of long-term Eurosystem loans to banks. What effects do you expect to see?

Here again, it all very much depends on the design features, which will be hammered out over the summer. What’s already clear is that each operation will run for two years, with the interest rate being linked to the rate for main refinancing operations during their term. This design is more in line with the market than the previous series of TLTROs, which we very much welcome.

So what you're saying is that interest rates aren't supposed to be too appealing. But of late, it would appear that the debate has gravitated back towards making the programme an ample source of liquidity for banks.

It ultimately comes down to whether the aim is to provide yet another expansionary stimulus or if it is to get banks accustomed to the idea of going back to the markets for their funding.

In other words, the programme has been adopted but the precise direction of travel is still up for grabs. What direction would the Bundesbank prefer to take?

Some progress towards more market-based funding. One possible idea might be to kick off in September with an interest rate close to market rates and to retain the option of being slightly more generous, if need be, in case the inflation outlook continues to deteriorate, though this is not a scenario we are expecting to see.

One critique that's often voiced is that the TLTROs are mainly a vehicle for Italian banks to purchase government bonds.

Needless to say, we have to eradicate any false incentives. But contrary to what some believe, there isn’t a fixed chain of events that is automatically set in motion. The opportunities and incentives for banks to get a free lunch depend on multiple factors, such as government bond yields and the extent to which the TLTRO bidding limits have been exhausted.

Yet more challenges lie ahead for money markets because reference rates such as LIBOR, EURIBOR and EONIA have fallen into discredit due to rigging and are set to be replaced by new benchmark rates. When will we be seeing these new rates?

Starting on 2 October this year, the ECB will publish the Euro short-term rate, or €STR for short, which has also been endorsed by the private sector working group as a replacement for EONIA. What is more, the private sector will probably unveil a concept in the summer for the successor to the longer-term EURIBOR reference rate.

What will the changeover look like in practice?

You have to grasp that there are loans and derivatives in the double-digit trillions which are calculated on the basis of these interest rates and have terms of up to 30 years. All these contracts need to be switched over – the follow-up tasks will be colossal. I can only urge every single credit institution and market participant out there to make timely preparations for this transition. Otherwise, they'll discover that the benchmark rate they are using for calculation purposes has disappeared all of a sudden.

Do credit institutions and capital markets also need to brace for a recession? Some recent indicators came in weaker than expected.

I’m not that pessimistic, particularly as far as Germany is concerned. Admittedly, there are some negative factors globally, but the domestic forces of growth are robust. We've got an exceedingly good employment situation, significant wage growth, upbeat funding conditions and fiscal policy stimuli. So there’s good reason to believe that activity will pick up again as the year progresses.

But inflation is still low. Market data indicate that investors are expecting rates to persist at around 1.2 % over the long run.

Our horizon is geared more to the estimates prepared by the Eurosystem, and on this score we're confident that inflation will move back towards the target range over the medium term. Incidentally, the market-based inflation expectations have also recovered somewhat of late.

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