In Europe, banks are beginning to feel the side effects from the ECB’s negative interest rate policy (NIRP), which (among other things) is meant to weaken the euro, fuel inflation, force banks into riskier lending, and prevent Eurozone economies from buckling under the sheer weight of their sovereign debt.
But it doesn’t work. Inflation remains much lower than the ECB’s target headline rate of 2%, European sovereign debt continues to grow at an alarming rate, and bank lending remains anemic in most countries. And it could actually end up killing the patient, Europe’s biggest banks.
That’s what Francisco González, Executive Chairman of Spain’s number-two financial institution, BBVA, just warned in a speech at the Spring Membership Meeting of the world’s most powerful financial lobby organization, the Institute of International Finance (IIF).
“Europe is caught in a trap,” he said. “It has to do something to boost its growth potential. But expansive monetary policy has led to negative interest rates, which are killing us.”
For BBVA, like most other European banks, the main problem with NIRP is the shrinking effect it has on its operating margins, which in turn puts unbearable pressure on its balance sheets. For example, when the Euribor is at zero, interest rates on variable rate mortgages are at next to zero. And these variable-rate Euribor-linked mortgages predominate in Spain’s mortgage market…
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