(Bloomberg) -- Europe's top banking executives ratcheted up criticism of negative interest rates ahead of a key European Central Bank meeting, warning of severe consequences to asset prices and the broader economy.
Deutsche Bank AG Chief Executive Officer Christian Sewing warned that more monetary easing by the European Central Bank, as widely expected next week, will have “grave side effects” for a region that has already lived with negative interest rates for half a decade. UBS CEO Sergio Ermotti struck a similar note, arguing negative rates are hurting social systems and savings rates.
Few economists believe another cut at this level would actually help the economy, and clients are telling the bank they won't invest a single euro more just because rates go 10 basis points lower, Sewing said at a conference in Frankfurt. All it would achieve is to further divide society by lifting asset prices while punishing Europe's savers who are already paying 160 billion euros ($176 billion) a year because of negative interest rates, he said.
“In the long run, negative rates ruin the financial system,” Sewing said at the event, organized by the Handelsblatt newspaper. Another cut “may make refinancing cheaper for states, but has grave side effects.”
Sewing's comments add to concerns mounting across Europe that the ECB's monetary policy threatens to stunt growth and distort the traditional dynamics of borrowing and lending. Ermotti said negative interest rates have created an “absurd situation” in which banks don't want to hold deposits. Yngve Slyngstad, the chief executive officer of Norges Bank Investment Management, Norway's $1 trillion wealth fund, has separately said that negative rates are the main worry at the world's largest wealth fund right now.
Lagarde Says ECB Needs Agility to Act Against Economic Slowdown
European banks are struggling to compete with Wall Street firms as lower European rates erode revenue from lending and burdens them with billions of euros in penalties for parking cash with the central bank. Many banks have said they oppose further cuts and want any such move to be tempered with exemptions, a process known as tiering.
Sewing in July announced radical cuts to his firm, including the loss of 18,000 jobs, after years of revenue contraction and low profitability pushed the shares to a record low. European banks are seeking to rein costs as they struggle to boost profitability. Italy's UniCredit SpA, France's Societe Generale and UBS are also either planning -- or weighing -- cuts.
The ECB will decide on Sept. 12 if it will cut its interest rates even further as a slew of economic indicators have recently showed a decelerating economy. European Central Bank presidential nominee Christine Lagarde told European lawmakers in Brussels on Wednesday that “a highly accommodative policy is warranted for a prolonged period of time.”
Will They Help, Hurt or Do Nothing? Central Banks Face Backlash
“What's really worrisome: central banks have hardly any tools left to effectively mitigate a real economic crisis,” Sewing said. “They have already cranked open the money tap -- most of all the European Central Bank.” Sewing said his bank had asked 285 corporate clients about the impact of another rate cut by the ECB.
Yngve Slyngstad, the CEO of Norges Bank Investment Management, Norway's $1 trillion wealth fund, said negative rates are its main worry right now. That's a sentiment echoed by Kees van Dijkhuizen, who runs ABN Amro Bank NV in the Netherlands.
“Banks are not relaxed today,” he said at the conference in Frankfurt. “The lower for longer -- some people even call it lower forever -- period that's at least for the foreseeable three, four, five years in the cards is a very difficult area.''
Still, the Dutch CEO broke with Sewing and said ultra-low rates are prompting some of his clients to make investments they wouldn't have previously, in order to eke out even comparatively small returns, for example in sustainability, he said.
Norway's $1 Trillion Man Vows to Stick to U.K. ‘No Matter What'
In addition to the lower interest rates, Deutsche Bank and competitors including Commerzbank AG are also contending with a worsening of the economic environment in Germany, just as they pivot more towards their home country. They had to set aside more money for loans to companies reeling from the impact of global trade disputes, Brexit uncertainty and distress in the autos sector.
“Banks' interest margins are under pressure in this environment and that's not going to change,” Commerzbank CEO Martin Zielke said at the same conference. “I don't think it is a particularly sustainable or responsible policy. But we have to recognize the facts and the facts are that winning clients in this environment helps work against that pressure.”
To contact the reporters on this story: Steven Arons in Frankfurt at sarons@bloomberg.net;Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net
To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Christian Baumgaertel
©2019 Bloomberg L.P.
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.
