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Euro zone banks can deal with ultra low rates - Coeure

Euro zone banks have dealt well with rock bottom interest rates and their biggest problems are not caused by loose monetary policies, a top European Central Bank official said on Wednesday, paving the way for more policy easing next week.

Bank earnings may be weak, constraining their ability to generate capital, but many have overcome negative central bank rates and the ECB's commitment to price stability has actually supported banking profitability, Executive Board member Benoit Coeure said.

The comments from Coeure, one of ECB chief Mario Draghi's top lieutenants, will be among the last guidance offered by the bank before its enters a quiet period ahead of its rate meeting next week, suggesting that arguments for easing remain firmly intact.

Benoit Coeure
Jason Alden | Bloomberg | Getty Images
Benoit Coeure

The ECB is expected to cut its deposit rate deeper into negative territory on March 10 - even though banks have argued that negative rates - effectively a charge on deposits at the ECB - compress their margins, limiting their ability to lend and making policy easing counterproductive.

Coeure's comments appeared to play down those arguments, suggesting that the biggest problems faced by the sector are legacy issues, such as bad loans, that have little to do with monetary policy. He added that inaction by the ECB would be more damaging.

"Many banks have been able to more than offset declining interest revenues with higher lending volumes, lower interest expenses, lower risk provisioning and capital gains," Coeure told a conference in Frankfurt.

"Last year, for example, euro area banks' aggregate net interest income increased, especially as crisis-hit banks refinanced expiring high-yield liabilities," he added.

The ECB is fighting ultra low inflation, exacerbated by tumbling commodity prices, and faces a risk that low price growth is perpetuated through the second round effect of low crude prices.

Although unconventional monetary policies have undesired side effects, including on bank interest earnings and asset prices, Coeure said meeting the ECB's mandate was still the top priority.

"Our commitment to our price stability mandate is vital to anchor expectations of nominal growth," Coeure said. "What would be the costs for the financial sector if monetary policy?"

He added that top issues faced by banks include a legacy of non-performing loans and unsustainable business models.

"These are challenges that have little to do with the central bank," he added.