ECB solutions and impact on the banks

What a difference a few weeks make. Market sentiment seems to have improved and the fears of imminent recession now appear a touch hasty. But the question of where markets head next continues to depend on policymakers.

The market already pricing aggressive action of “Super” Mario Draghi, there’s a risk of disappointment just as there was in December 2015. Analyst expectations include a 10-20 basis point cut in the deposit rate.A negative deposit rate means that ordinary banks have to actually pay the ECB to deposit money, rather than receiving money as they would in a normal environment. A further complication is that it’s not just the euro zone that has resorted to negative rates. Board Member Benoit Cœuré noted in a speech on 2 March that the ECB is well aware of the issue but pointed out that many banks have overcome negative central bank rates and the ECB’s commitment to price stability has actually supported banking profitability. The good news is that there are ways to reduce the spillover effects of negative rates. ECB vice-president Vitor Constancio said in a speech on Feb 19th that more stimulus could be provided in a way that mitigates “the immediate, direct impact on the cost on banks”. Analysts at Barclays, BNP Paribas and RBC capital markets have all suggested a ‘tiering’ of deposit rates could follow to help reduce the cost. Discussion of that is something to look out for on Thursday and will no doubt provide some a relief for banks investors. I asked Draghi  this time last year about the impact of extraordinary policy on the profitability of the insurance and banking sector. He acknowledged the concern but also said it was a ‘high class’ problem. The inference being that there were bigger issues to solve.