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German, Dutch banks bear the brunt of 7 years of negative rates – ING study

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German, Dutch banks bear the brunt of 7 years of negative rates – ING study

Seven years after the European Central Bank introduced negative interest rates, most banks in the eurozone are still struggling to offset the impact of the policy. New research shows that lenders in Germany and the Netherlands have been hit the hardest, in part due to their reluctance to participate in the ECB's long-term lending programs.

Two main factors have led to redistributive effects of negative rate policy: the uneven split of bank deposits across the eurozone, and different levels of borrowing under the targeted longer-term refinancing operations, or TLTRO, programs, which the ECB launched in June 2014, according to the report by Dutch bank ING.

Excess liquidity and borrowing needs were unequally spread among eurozone banks from the outset, with lenders in northern eurozone countries holding more excess reserves than banks in southern ones, Teunis Brosens, ING head economist for digital finance and regulation, said in an interview. This is why banks in the north did not make use of TLTRO programs as much and as early as their peers in the south, Brosens said.

Overall, banks in Germany and the Netherlands have so far shouldered the highest net cost resulting from ECB negative rate charges, while peers in Italy and Spain reaped the most benefit from cheap central bank funding that helped them tackle the negative rate impact, ING estimates show.

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Before the COVID-19 pandemic hit, banks in Italy, Spain and other southern European countries drew the bulk of TLTRO loans because they needed the funding more than northern European banks, and because they were "less concerned about any stigma attached to taking out TLTRO loans" due to their low excess reserves, Brosens said.

TLTRO borrowing only became more attractive for northern European banks after the ECB relaxed the terms of its latest TLTRO III program amid the pandemic in 2020, offering banks borrowing at a rate of minus 1% if they kept lending to the economy. This meant banks could benefit from the 50 basis points difference between the negative rate on TLTRO III loans and the 0.5% negative rate they pay for excess liquidity reserves held at the ECB.

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Over the past 12 months, banks in Germany, the Netherlands and other northern European countries have taken out large amounts of TLTRO III loans and have enjoyed some positive effects from that. However, comparing TLTRO III negative rate revenues to costs for ECB negative rate charges for excess liquidity over the last five years, there are clearly more benefits for southern European banks than for those in the north, Brosens said.

"In the end, I don't think these are really small numbers. We're talking about almost €6 billion net gain in Italy and almost €3.5 billion net gain in Spain, versus a loss of €4 billion in Germany and €1.9 billion in the Netherlands," Brosens said.

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A high dependence on net interest income makes most European banks susceptible to the effects of a negative rate environment. While many managed to offset the impact through new loan growth in the years before the pandemic, the positive effect disappeared with the onset of COVID-19. At the same time, lockdowns caused a spike in deposits and banks with historically high deposit volumes were overwhelmed.

Eurozone banks have paid €34 billion in charges on their excess liquidity to the ECB since the introduction of negative deposit rates in 2014, data compiled by German financial technology company Deposit Solutions shows. However, the burden is unequally distributed across Europe. In 2020, German and French banks accounted for 60% of the €8.5 billion total eurozone charges, paying 2.7 billion and 2.5 billion, respectively.

Despite their high excess reserves, French banks also have large TLTRO borrowings, and the two almost cancel each other out, according to ING. Dutch banks, however, have seen more costs than benefits despite paying a smaller negative charge amount, the ING data shows.

Despite the benefits of TLTRO III, most big Dutch banks have said they do not expect their net interest income to recover in 2021.