Reportedly, following the ECB (European Central Bank) curbed rates in the last week, an economist reported CNBC that large banking institutions encounter the peril of stoppage if interest rates across Europe persist to remain negative. Simon Baptist—Global Chief Economist at Economist Intelligence Unit—said, “I feel there are big concerns for the banking sector’s profitability.” In the last week, the ECB trimmed its main deposit rate by around 10 basis points to −0.5%, which is an all-time low. The European banks for long have struggled in a constantly lower interest rate background. The rates in the Eurozone first reach zero in 2012 and were negative in 2014. The low-interest rates impacted banks’ profits since they narrowed the range that banks can earn.
Baptist said to CNBC, “If interest rates remain below zero, they are definitely not all going to be profitable, and will be running as they are at present. Either there would be consolidation or possibly some bank failures, or some actually radical amendments in business models.” In the last week, the ECB decreased the interest rate that banks receive for depositing cash with the central bank, pulling it further below zero. That basically means the central bank increased the amount it charges banks for the additional money they hold on to overnight.
Earlier, ECB was in news as the central bank curbed its deposit rate and launched a new bond-purchasing program. The ECB declared a huge new bond-buying program in a proposal to encourage the ailing Eurozone’s financial system. The central bank’s QE (quantitative easing) program will involve $21.9 Billion (20 billion euros) every month of net asset purchases for as much as it deems requirement. The ECB also curbed its main deposit rate by 10 basis points and now anticipates interest rates to stay at their existing or lower levels until it has seen its rise outlook.
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