ECB Needs Clear Monetary Policy Case for Tiering, Knot Says

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The European Central Bank would need a clear monetary-policy reason to consider acting to mitigate the effects of negative interest rates on banks, Governing Council member Klaas Knot was quoted as saying Sunday.

“There must at least be some evidence that negative rates are disrupting the impact of monetary policy through their effect on bank profitability,” Knot, who is the governor of the Dutch central bank, said in an interview with Handelsblatt newspaper.

“I must also be convinced that tiering is the best way to solve that,” Knot added. “I have my doubts on both points. In any case, the effect on banks could be very diverse depending on their size and business model.”

Knot's remarks echo comments from ECB Chief Economist Peter Praet last week. Staff at the central bank are examining the issue of tiering -- where some of banks' excess reserves are exempt from the lowest rate -- but action isn't a done deal, Praet said in a Bloomberg interview.

Knot told Handelsblatt the ECB's fresh round of monetary stimulus, via loans known as targeted longer-term refinancing operations, will be less favorable and he expects lenders to tap a smaller volume. Details of the loans -- which offer cheap funding -- will likely be published in June or July before the first operation in September, he added.

Read more: ECB Contender Villeroy Scores Win With Sub-Zero Rate Lament

“In countries where we are concerned about interdependence between banks and the state, lenders have already used up the maximum scope of the program and invested part in government bonds,” Knot said. “In the new program they can, at most, maintain their holdings in government bonds, there is no room for additional purchases.”

Other highlights:

• Knot says he is skeptical about mergers of large banks as targeted “synergies” often do not materialize.
• Mario Draghi's successor as ECB president will have to manage a “very cautious normalization” of monetary policy.
• It's clear there is a slowdown in the euro-region economy but there will not be a recession or a new crisis.
• Knot expects the euro economy to pick up in the second half of this year due to robust domestic demand. “We should not dramatize the current situation,” he says.
• Brexit is currently the biggest political risk and markets have not priced in a hard U.K. exit. “If it comes, it can potentially lead to a reevaluation in the markets and the pound would come under pressure.”
• Knot declines to say whether he wants to succeed Draghi.

To contact the reporter on this story: Iain Rogers in Berlin at irogers11@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net, V. Ramakrishnan

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