There is no end in sight for Europe's squeezed banking sector as the continent's top lenders prepare to feel the pain of negative interest rates for at least the next six months.
Nearly every bank in the Eurozone said their profits had been hit as a result of the European Central Bank (ECB)'s historically low interest rates of minus 0.4 per cent in a new survey from the ECB published today. A huge majority also said they expect the amount of cash they can make from regular banking activities to continue to slide until well into next year.
Banks have complained about negative interest rates since they are percieved to squeeze their net interest margins - the difference between how much they can take in through interest on loans and how much they have to dish out in interest to savers. Big lenders are charged 0.4 per cent on an annual basis to stash their money with the ECB, although there is a psychological barrier to charging customers and savers money to leave cash in their bank accounts, so banks absorb the difference, reducing profits.
Taking the plunge: Negative rates across the world
|Eurozone (ECB)||Minus 0.4 per cent|
|Japan (Bank of Japan)||Minus 0.1 per cent|
|Sweden (Riksbank)||Minus 0.5 per cent|
|Denmark (Danmarks Nationalbank)||Minus 0.65 per cent|
|Switzerland (Swiss National Bank)||Minus 0.75 per cent|
In its latest bank lending survey, 83 per cent of banks told the ECB its policies had reduced their net interest income. One in eight said they had been forced to hike charges and fees for business customers to try to offset the costs, and 81 per cent expect negative interest rates to have a negative effect on their earnings over the next year.
The survey is the latest indication of the pain facing the continent's financial sector, with lenders suffering a cocktail of multi-billion euro lawsuits and fines, balance sheets stuffed full of risky "non-core" assets, and a general lack of sympathy from politicians and populations. Most recently, Angela Merkel was forced to deny rumours of a state-backed bailout for Deutsche Bank, while fellow German lender Commerzbank announced 10,000 job cuts.
Read more: Where did it all go wrong for Deutsche Bank?
ECB president Mario Draghi has also hit out at banks in recent weeks, insisting they stop blaming him for their failure to adapt their business models to the post-crisis era. Last month Draghi said the benefits of low interest rates in terms of higher asset prices, more lending and fewer defaults "tend to outweigh the impact on net interest income over the short-term".
A separate report out today from Moody's found Japanese banks "will see only a limited deterioration in their profitability" as a result of the Bank of Japan (BoJ)'s negative interest rate policy. The BoJ took rates to negative 0.1 per cent early this year though a structured arrangement means only one-third of banks cash actually loses money when they hand it to the central bank for overnight safekeeping.