Negative deposit rates could boost — rather than hurt — bank profitability, European Central Bank (ECB) Vice President Vitor Constancio told CNBC on Wednesday.
"It is very difficult to disentangle all of the effects," Constancio said. "One effect is that if the banks react to such a measure by becoming more active in using liquidity to do something on the asset side, then this could increase their profitability."
Deposit rates are paid by the ECB to banks, for cash parked at the central bank. Negative rates could prompt banks to lend money rather than leave it with the ECB, but concerns have been raised that banks' profits would fall as a result.
However, Constancio said that in Denmark, the only European country to have introduced negative deposit to date, there were wider economic benefits.
"To respond to the increased costs of having to face negative deposit rates at the central bank, they increased their loan rates. But at the same time, there was also the effect of speeding up the use of liquidity that they have, and that can also have some positive effects on the economy."
Talk of negative deposit rates has intensified since May 3, when ECB President Mario Draghi said the central bank had an open mind on the issue.
"We said it in the past, we are technically ready... And we will look again at this with an open mind and we stand ready to act if needed," Draghi said during his press conference, after the last ECB rate decision.
On May 13, ECB governing council member Ignazio Visco told CNBC the central bank was "technically prepared" to introduce negative deposit rates, and the economy was "capable of taking it on board."
However, the central bank has also tried on other occasions to play down the idea.
(Read More: ECB's Visco: Deposit Rates Could Go Below Zero)
.- By CNBC's Katrina Bishop, follow her on Twitter @KatrinaBishop