ECB’s Zero-Interest Policy “Very Problematic”

A council of academic advisers to Germany’s economy ministry has identified grave risks for the European financial system in the European Central Bank’s zero-interest rate policy, in a new report published on Wednesday.

“The monetary policy pursued by the European Central Bank since 2014 is not commensurate with the risks,” the experts wrote in the report, a copy of which was obtained by Reuters.

They said the policy was aimed exclusively at stimulating lending and economic growth by lowering interest rates, while disregarding the resulting burdens for the financial sector.

“The financial system sees interest rates of zero or less than zero as very problematic for various reasons,” the advisers said in their report.

This policy—and the continuing growth of loans with too-low interest rates—have dampened profit margins in the sector and raised the risk that necessary reforms in the sector would not be carried out, it said.

“The longer the zero-interest-rate policy of the ECB continues, the greater are the risks for the financial sector,” the report said.

German officials have long been critical of the ECB’s ultra-low interest rate policy but pressure has grown in recent months with inflation in the eurozone rebounding.

The report said that many financial institutions, including insurance companies, were having trouble generating any profits and covering their costs as a result of the ultra-low rates.

The council of academic advisers provides guidance to the economy minister but its recommendations are not binding.

 NPL Guidance Adds Pressure

ECB guidance calling for eurozone banks with high levels of non-performing loans to set ambitious time-bound quantitative NPL reduction targets could in extreme cases push the weakest bank closer to a formal resolution process, triggering losses for senior bondholders, a Fitch report said.

“We believe there are limits to how quickly the ECB can force some of the weakest banks to reduce NPLs without crystallizing capital shortfalls that they may not be able to address privately, although precautionary recapitalization with state funds may be possible for some banks if strict conditions are met,” the report said.

The ECB has not said how it will determine the ‘high NPL banks’ subject to the guidance, “but we calculate that at least 35 of the 125 ‘significant institutions’ under the ECB’s direct supervision have levels of NPLs that are double the eurozone average, based on European Banking Authority data. These are mostly in Greece, Ireland, Italy, Portugal, and Spain, but some operate in more benign economies in northern Europe.