Official expectations for the future evolution of international interest rates anticipate that they will remain low from a historical perspective. The normalization of expansionary monetary policy will be gradual, patient, and predictable, under a scenario where price risks are balanced, with inflation below its target level, and there are still threats to growth. The financial stability that has been so difficult to achieve could be threatened again, which will require monetary policy to remain expansionary. The fundamental question focuses on its magnitude rather than its bias. And this is no minor issue: maintaining excessively loose financial conditions for too long can also pose an additional risk to financial stability. <\/p>\n
For the first time in its history, the ECB decided at its June 2014 meeting to set one of its benchmark interest rates in negative territory. The deposit facility is not the official interest rate, but the penalization of banks’ excess reserves when they maintain a high liquidity surplus has turned negative interest rates into the main reference point of European monetary policy. It is uncharted territory, exceptional according to the ECB itself. Although we have been living with them for more than three years now. Suffering them in the case of banks. Negative interest rates had the explicit objective of incentivizing European banks to lend. Once the flow of bank financing to businesses and households in Europe has been restored, it is natural that a debate should open on the benefits and costs of maintaining this exceptional penalty. <\/p>\n
Have negative interest rates really incentivized an increase in bank financing? The data in principle demonstrate this, although it is important to view the monetary measures adopted as a whole: negative interest rates, direct purchase of assets in the market, and setting expectations with very loose financial conditions. In the end, it is difficult to calibrate the positive impact of each of these measures separately. The improvement in asset quality, a strong balance sheet adjustment, and the improvement in economic prospects themselves can explain a greater supply of bank credit, which is fundamental to explaining the intensity of the European economic recovery. <\/p>\n
Negative interest rates have deteriorated banks’ interest margins. But the magnitude of this negative impact depends on the institutions’ liability model; it is greater the higher the weight of deposits on the balance sheet. In the end, the financial repression for savers derived from an extreme expansionary monetary policy decided by central banks has been channeled through banks’ balance sheets. In their effort not to penalize savers, credit institutions have maintained positive returns on deposits and have absorbed the official negative interest rates in their results. The recent improvement in banks’ profitability has come from a combination of factors: increased financing to the private sector, greater efficiency, and improved credit risk derived from the economic improvement itself. <\/p>\n
Having accepted the potential benefits of negative interest rates at the worst moment of the crisis, does it make sense to maintain them? We must assess the danger that their persistence may incentivize excessive risk-taking by financial agents or distort resource allocation. It is also necessary to consider whether it is advisable to prolong financial repression and make it difficult for term returns to offer sufficient confidence to boost productive investment. All of these are risks to the financial stability itself that has been so difficult to achieve. And as the Bank for International Settlements emphasizes in its latest January report, central banks should not fear greater market volatility derived from necessary monetary normalization. A “healthy” volatility (BIS dixit) that should not be confused with a deterioration in financing conditions.<\/p>\n
Jos\u00e9 Luis Mart\u00ednez Campuzano, spokesperson for the Spanish Banking Association<\/p>\n