ECB Needs Time to Assess Negative Rate Impact, Villeroy Says

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The impact on banks from negative rates mustn’t be exaggerated and the European Central Bank needs time to assess the policy, French central bank Governor Francois Villeroy de Galhau said.

In comments suggesting he’s softening his push to rethink the squeeze on banks from sub-zero rates, Villeroy said it was too much to claim the policy alone is pressuring their profit margins. Monetary policy is having a favorable effect for financial institutions, according to the French central banker, who is one of the contenders to succeed Mario Draghi as the ECB’s next president.

“Let’s allow time for this work to be done and for the necessary decision to be taken,” Villeroy said in his speech in Paris Tuesday. “In the case of banks in particular, the issue should certainly not be ignored, but we also need to avoid blowing it out of proportion.”

Draghi has signaled the Governing Council will assess the impact of its below-zero policy at its next meeting on June 6, fueling speculation that the ECB could follow central banks in Japan and Switzerland by introducing a tiering system that excludes some bank reserves from negative rates.

Yet recent comments from some officials including Bundesbank President Jens Weidmann, suggest there is little appetite to change the policy that has been in place for five years, not least because it could signal rates could be cut even lower.

“It’s a subject that easily becomes impassioned. I think we need to keep balance on this subject,” Villeroy said. “It’s neither a question of blowing it out of proportion, by making it the sole explanation for the weak or insufficient profitability of European banks, nor of ignoring it.”

To contact the reporters on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net;William Horobin in Paris at whorobin@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Zoe Schneeweiss, Lucy Meakin

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