Euro zone

Finland: political shift to the left

For quite some time now, the political fringes have been gaining in strength in the elections in Europe. This trend is also very evident in Finland, where the Social Democratic Party (SDP) won the general election and is therefore the strongest party in parliament for the first time since 1999. It was followed closely in second and third place respectively by the right-wing populist Finns Party and the conservative National Coalition Party. The Centre Party of Finland of the (as yet) incumbent Prime Minister Sipilä is now only expected to be parliament’s fourth strongest party in the future, so that Sipilä clearly is the loser of this election. The Greens and the Left Alliance also made significant gains. The results reflect very strongly the topics that dominated the election campaign: aside from the Sipilä government’s strict austerity policy of reforms as well as higher levels of immigration in recent years,…

The ECB’s hopes are colliding with reality

The eurozone’s monetary custodians did not resolve to adopt any new monetary-policy measures at today’s Governing Council meeting. In principle, new decisions were not to be expected because the ECB has recently extended its forward guidance and announced the launch of fresh liquidity measures. Regarding TLTRO-III, ECB President Draghi has promised that details about the precise terms of the new series will be communicated at one of the forthcoming meetings of the Governing Council. It was emphasised that the pricing of the new TLTRO-III operations will take its bearings by further developments in the economic outlook as well as by bank lending. It would appear that the ECB’s top echelons will decide definitively about the details of TLTRO-III at the June Governing Council meeting. This is when the next regular quarterly GDP projections are scheduled to be published. What is noteworthy is that Dr. Draghi accentuated in today’s Introductory Statement…

Negative interest rates impacting like a special tax in the euro zone

The low profitability of European banks has long been a problem, and the ECB in its role as banking supervisor regularly addresses this issue. While the institutions affiliated with the US Federal Deposit Insurance Corporation (FDIC) managed to generate a return on equity (ROE) of 11.8% in the fourth quarter of 2018, the 190 European banks chalked up average ROE of just 6.5%. In addition to other structural issues and business policy decisions, the ECB as monetary policy maker is also a reason for the low profitability. Banks in the USA are benefiting from the fact that their deposits, most of which are still interest free, have appreciated in value thanks to interest rate hikes, while European banks are actually having to pay an interest rate of currently 0.40% per annum on their surplus reserves at the ECB due to the deposit rate being negative. Based on current credit balances,…

Loan markets adjust for weakening growth – anticyclical capital buffer counterproductive

As the ECB’s current survey of Euroland banks shows, corporate demand for loans held steady in Q1 2019 and the banks also hardly changed their loan approval standards, if at all. By contrast, demand for private housing construction loans continued to grow thanks to the low interest rates and banks tightened their approval guidelines for property financing. The majority of banks also expect to see rising demand in both categories in the coming months. Although the proportion of optimists has edged up marginally since the January survey, compared to 2018 there has been a massive decrease in the size of the majority of credit institutes who believe in growing demand for loans. This is consistent with the growth trend in European loan markets, which has apparently reached its zenith. For corporate loans, this was the case as long ago as the end of September last year, when growth rose to…

Next ECB Council meeting – what can be expected

In the coming week, the eurozone’s monetary custodians are scheduled to hold their regular meeting to discuss the appropriateness of their monetary-policy stance. Given that ECB representatives already adjusted their monetary-policy settings at the March Governing Council meeting (forward guidance / TLTRO-III), we are not anticipating any milestone decisions to be announced this time round. Unfortunately, it is to be assumed that the ECB will continue to keep its cards close to its chest regarding details of the new TLTRO-III operations. At the press conference following the Governing Council meeting, at the latest, the current market speculation about the introduction of a multi-tier deposit rate is likely to be aired. This topic is the subject of controversial debate in the financial market as well as at the ECB. One of the aspects which we regard as being problematic in this connection is that the ECB would send out contradictory signals…

Negative interest rates can have undesirable side-effects

During the course of the monetary-policy deliberations at the most recent ECB Governing Council meeting, the debate finally turned to the possible negative repercussions of the persistently low interest-rate level on profitability in the banking sector. Members of the policymaking committee also discussed whether such undesirable consequences could have an impact on financial stability in the longer term. At the same time, though, it was emphasised that the knock-on effects on banks were very different, depending on which business model was being used. According to the latest ECB Monetary Policy Account, ECB representatives did not talk about concrete measures to alleviate the strains weighing on the banking sector. It should be noted in this connection that speculation about the introduction of a tiered deposit rate has picked up of late. In our view, however, such an arrangement would additionally complicate the monetary-policy communication process. We are therefore sceptical about the…

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