ECB Policymaker Sees No Need for Tiered Rates to Help Banks

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The European Central Bank’s negative interest-rate policy has been effective at stimulating the economy and there isn’t a need at this stage to mitigate the profit squeeze it’s caused commercial banks, according to Governing Council member Vitas Vasiliauskas.

“I think it’s still a positive tool and at this stage, today, I don’t think that there is a need for any change,” he said in an interview on Saturday. “I am not very enthusiastic about possible tiering, but let’s wait until the analysis has been made and then we will decide.”

The ECB’s deposit rate has been below zero for almost half a decade, and weaker economic growth in the 19-nation euro area has pushed back expectations for a rate increase. Banking associations, however, have become increasingly vocal about detrimental side effects on profitability, and policy makers have agreed to study measures to blunt the impact, potentially by exempting some portion of deposits in a so-called tiering system.

The model, where some reserves institutions hold at the central bank are excluded from the penalty of negative rates, has been the typical approach used by other central banks. It’s one that the ECB previously rejected, partly out of concern on its complexity.

Officials have emphasized they would only tweak their negative rate policy if there’s evidence banks are curbing lending. There has been little proof of that so far despite frequent complaints especially from bankers in Germany and France that the industry is losing more than 7 billion euros ($7.9 billion) a year because of negative rates.

“We do not see any big changes in credit supply especially for households, so I don’t think that there is some kind of risk to the transmission coming from credit supply,” the 45-year old Lithuanian governor said. “The banking sector has other problems which should be solved. We have too many banks in Europe, so you could think about consolidation.”

While Vasiliauskas and his colleagues are welcoming the review on negative rates announced earlier this week by President Mario Draghi, he is not the only governor who has expressed doubts about the imminent need for a policy response. Dutch central banker Klaas Knot pushed back against the idea of softening the effect of negative interest rates in a Bloomberg Television interview on Thursday, saying that it has stimulated credit growth. Other considerations are “a little bit outside the realm of monetary objectives,” he said.

Germany’s Jens Weidmann said he “wouldn’t necessarily overestimate” the effect that tiering could have on lending, given that charges on central bank deposits are still relatively small in comparison to overall returns from credit extension. The ECB has frequently argued that the economic recovery supported by its policy has helped banks generate business.

Other Ammunition

The debate falls into a wider context of an extended period of economic deterioration, which already saw the ECB downgrade its outlook for growth and prepare more support for lending to the real economy just a few months after halting its crisis-era bond-buying program. Analysts see the introduction of a tiering system as possibly paving the way for lowering interest rates even further should that step be needed.

“Of course tiering is a means of ammunition. But without tiering we still have other tools,” Vasiliauskas said in Washington on the sidelines of IMF spring meetings. While the ECB’s baseline view is the economic soft patch is transitory and will improve later in the year, he has “some small doubts that this temporary slowdown will be not so very temporary.”

To contact the reporter on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Sarah McGregor, Piotr Skolimowski

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