Mario Draghi tells banks to stop complaining about negative interest rates

Jake Cordell
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Mario Draghi European Central Bank (ECB) President
Mario Draghi is not best pleased at being blamed for the banking sector's woes (Source: Getty)

Mario Draghi has issued a robust defence of his negative interest policy in a conference designed to address threats to financial stability across the Eurozone.

The era of ultra-low interest rates has been cited as one reason for the woes of banking sectors across the world, since lower rates squeeze the profits of financial institutions as they cannot charge such a big difference in the interest they make borrowers stump up and the amount they pay out to savers – known as the "net interest margin".

As Draghi acknowledged: "Low interest rates tend to squeeze net interest margins owing to downward rigidity in banks' deposit rates".

Earlier this year, the International Monetary Fund (IMF) found one-third of all lenders across the Eurozone would struggle to turn a profit.

Deutsche Bank and Credit Suisse were both booted from the Eurostoxx 75 index of leading European companies over the summer due to their dramatic share price slump, which has been driven by a combination of global fears and misconduct fines.

Read more: Deutsche Bank's annus horribilis

But the European Central Bank (ECB) president said today the benefits from low interest rates in terms of higher asset prices, a greater stock of lending and fewer debt defaults "tend to outweigh the impact on net interest income over the short term."

He added: "The picture varies depending on banks' business models ... some banks will need to review their business models to bolster profitability."

The ECB's headline deposit rate is currently minus 0.4 per cent, meaning big lenders are charged £4 a year for every £1,000 they stash with the central bank in its overnight deposit facilities.

Draghi was speaking at the first conference of the European System Risk Board (ESRB) in Frankfurt.

Taking the plunge: Negative rates across the world

Eurozone (ECB) Minus 0.4 per cent
Japan (Bank of Japan) Minus 0.1 per cent
Switzerland (Swiss National Bank) Minus 0.75 per cent
Sweden (Riksbank) Minus 0.5 per cent
Denmark (Danmarks Nationalbank) Minus 0.65 per cent

Fresh worries about the stress placed on banks' profits have risen in the wake of the UK's vote to leave the EU, with the prospect of a lower-for-longer interest rate environment worrying some investors. Analysts at Deutsche Bank stressed earlier this week that the "dominant theme" for the sector "remains rates and the net interest income outlook."

However, for some, including Draghi, the tide has turned. HSBC analysts said they believed investors are "too negative on negative rates", while Credit Suisse said it saw bank share prices recovering in the near future.

Instead of low interest rates hurting banks, Draghi said it was technological innovation and the era of "over-banking" across the Eurozone that was the real challenge for banks.