Regulation / banks

ECB WOULD DO BETTER TO CHANGE ITS KEY INTEREST RATE POLICY SOONER THAN LATER

In July 2012, the European Central Bank (ECB) lowered its deposit rate to zero, and some two years later it became negative for the first time at minus 0.1%. Since then, commercial banks in the eurozone have had to pay „penalty interest“ on surplus liquidity parked at their central bank. Only three months later, in September 2014, the ECB lowered the deposit rate once more to minus 0.2% and then again in December 2015 to minus 0.3% and finally in March 2016 to minus 0.4%. In March of last year, the main refinancing rate was also lowered to zero which meant that the commercial banks in the eurozone were now able to obtain the required central bank liquidity in normal tender operations without having to pay interest on this. Since then at the latest, money market rates and a considerable share of capital market yields in the euro area have…

How much politics can the Fed weather

This year the usual four voting FOMC members will be replaced. Given the annual rotation of voting rights, the monetary policy committee will in 2017 again be more strongly peopled by monetary policy doves who tend to advocate a cautious path to raising interest rates. The financial market expects to see two or at most three rate hikes. For this year, we expect that the Fed will raise its key lending rates twice and in each instance by 25 basis points. The currently vacant seats on the Board of Governors could be seized by the incoming US President as an opportunity to gain influence on the Fed’s uppermost decision-making body relatively swiftly. Moreover, it is to be feared that he will neither extend the period in office of the Fed Chair Janet Yellen, which ends on 3 February 2018, nor approve another period in office for Fed Vice Chairman Stanley…

Construction permits: despite a sharp rise, still failing to match demand for new housing

In mid-November, the Federal Statistical Office published new figures on permits for residential construction in Germany. They show that in the first three quarters of the current year permits rose by a considerable 24% to around 276,300 compared with the same period in the previous year. This is a positive development, as the shortage of properties is contributing to the rapid rise in property prices in many Germany conurbations. Despite this, residential construction still lags demand for new housing. Should the current trends continue, we can count on 370,000 residential construction permits for 2016 as a whole. Completions are likely to increase by some 9% to 270,000 residential units, meaning that residential construction remains well below the figure of 400,000 homes per year, which are required according to property experts. The longer the trend persists, the greater the number of homes which will have to be built in the years…

Financial stability given the stress of low interest rates

The Financial Stability Report recently published by Deutsche Bundesbank can be read to say that there is no acute threat to financial stability at present, but there are indeed a series of risks that bear monitoring. We share this assessment. From our viewpoint, the extremely low interest rates (for which the ECB is partly responsible given its monetary policy) are among the single greatest dangers to the stability of the financial markets in both Germany and Europe. The consequences of low interest rates include massive forfeited interest income on the part of citizens, something that makes establishing provisions for old age difficult. Another impact is the huge bottleneck in financial investments that can be seen from the fact that already one quarter of private monetary assets are parked in sight deposits and cash. Life insurers are also busy hunting for profitable investments, and are finding it ever harder to generate…

Is there a future for European banks?

The weakness of the European banking sector appears to be centering on Germany at the moment. Last week, two of our banks stood in the focus of market happenings. What must happen for the situation in the European banking sector to stabilize and improvement to become possible in the medium term? Huge upheavals were sparked off at Deutsche Bank when the US Ministry of Justice announced that the bank could face a 14 billion dollar fine. Commerzbank has announced yet another restructuring in order to strengthen its profitability. But the burdens on European banks are not merely confined to Germany. All EU countries are affected by this. Three factors are essentially responsible for the burdens facing European banks – low interest rates, regulatory requirements and the new rivals, known as the FinTechs. In Germany, the burdens are compounded by the existence of too many banks. This can be attributed to…

Bank Lending Survey signals that lending is growing – How successful is ECB policy really?

As can be seen from the ECB’s July Euro Area Bank Lending Survey, the banks in the Euro area still expect increasing credit demand. Although the number of more optimistic banks has shrunk somewhat compared to April, they are nevertheless still clearly in the majority. Above all, the banks take a positive view of credit demand from enterprises and households. Nor do they plan to tighten their credit standards. That sounds good. So is there hope that the upturn in bank lending that is gradually emerging will pick up momentum and stimulate investment in the economy? Ultimately, this is what the ECB’s very expansionary monetary policy aims to achieve. A closer look at the statistics shows that the inundation of very cheap central bank funds has not been very efficient so far: while the volume of loans granted by commercial banks “to Euro area non-financial corporations” grew a considerable 3.1…

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