Executives urge tax cuts and increased spending as favoured path to economic growth
David Crow in Davos
© FT montage
Eurozone bank executives have launched a fresh lobbying push to convince policymakers of the dangers of long-term negative interest rates, warning they will hurt savers and pensioners while fuelling price bubbles in riskier assets.
Bank chief executives have spent the past two years trying to force the European Central Bank to reverse its negative interest rates, which were first introduced in 2014. Other European central banks including Switzerland and Denmark also have negative rates.
Rates below zero have slashed the amount that the region’s lenders earn from bread-and-butter lending and crushed their profit margins.
But bankers’ entreaties have fallen on deaf ears, with policymakers concluding that the benefit to the eurozone economy outweighs the pain for lenders. One of Mario Draghi’s parting acts before standing down as ECB president last autumn was to tell banks to stop “being angry” about negative rates and instead focus on fixing their flawed business models.
Now European bankers are taking a different approach. In a series of private meetings with the region’s regulators and politicians at the World Economic Forum in Davos, bankers have warned of what they see as the broader perils of long-term negative interest rates, according to several people briefed on the discussions.
They pointed to data showing the impact of ultra-loose monetary policy is petering out and urged policymakers to cut taxes and increase spending to boost economic growth.
Ana Botin, executive chairman of Santander, the Spanish bank, praised Mr Draghi for “saving” the euro but said: “From here onwards it is critical to look at data and behaviours.”
“It seems in many [eurozone] countries the pros of negative rates don’t outweigh the cons,” Ms Botin said in an interview with the Financial Times. “People are not taking out more loans, and savers are understandably getting more worried about how they’re going to plan for the future.”
Ralph Hamers, chief executive of ING, the Netherlands-based bank, said that “no industry can live with raw materials that are more expensive than the price of finished goods”.
Mr Hamers also pointed to the impact on pensioners, some of whom are having to put more towards their retirement to offset the loss of income from bond yields — investments that have traditionally been used by fund managers to pay for future liabilities.
He added: “The industry is saying that [ultra-loose monetary policy] doesn’t work any more. It is so detrimental to savers’ confidence that it is having the reverse effect, and consumers are starting to save even more to make up for losses in their pensions.”
Two chief executives of large eurozone banks said they were also working on plans to pass the cost of negative rates on to a much larger chunk of retail savers, setting the stage for a political backlash that the banking industry hopes will lead to wider public awareness of the ECB’s policy.
So far the majority of banks have charged a fee only to corporate depositors and wealthy clients with balances over €1m, but the executives said this could be extended to all customers with more than €100,000, the limit for most deposit guarantee schemes in Europe.
“The whole market is looking at this,” said one of the executives. “Over time, we need to decrease the threshold at which we charge.”
Thomas Jordan, head of the Swiss National Bank, on Thursday defended Switzerland’s five-year policy of negative interest rates and signalled a willingness to keep borrowing costs at minus 0.75 per cent or cut again if necessary. Switzerland needs negative interest rates, the central banker said on the sidelines of the Davos meeting.
But some bankers point to price bubbles in riskier assets such as equities and illiquid investments like private equity and privately held companies, which could tumble in value in the event of a recession.
“Fund managers . . . looking for yield have put their money to work into credit like commercial real estate and leveraged lending,” said Huw van Steenis, an executive at UBS and a former adviser to Mark Carney, the outgoing Bank of England governor.
David Solomon, chief executive of Goldman Sachs, cited the impact of negative rates in the eurozone and low rates in most other developed economies as a factor in the inflated, multibillion-dollar valuations that private companies such as WeWork have been able to attain.
“In an environment where for a long, sustainable period of time interest rates have been zero, and money has basically been free, it pushes people out [along] the risk curve,” he said. “One of the consequences of that is people chase growth, and people start to overvalue growth.”
Meanwhile, bank executives have also been lobbying politicians in countries with budget surpluses — most notably Germany — to loosen fiscal policy in the hope that more public spending and tax cuts will boost growth and inflation, paving the way for the ECB to start raising rates.
One chief executive involved in the effort said it was a “long game” designed to push policymakers to “reflate” the eurozone economy, noting that the ECB had “stopped listening” to complaints about bank profitability.
Jamie Dimon, the chief executive of JPMorgan, said he viewed negative rates with “trepidation”, describing them as “one of the great experiments of all time” and warning “we still don’t know the ultimate outcome”.
“I think it’s very hard for central banks to forever make up for bad policy elsewhere,” Mr Dimon said in an interview with CNBC. “That puts them in a trap. We’re a little bit in that trap today with rates so low around the world.”
Banks have also been supported in their effort by the US administration’s Davos delegation, which has also been urging European politicians to implement a fiscal stimulus.
Larry Kudlow, the White House’s top economic adviser, told a panel that Europe needed to cut taxes and regulation on business — in effect mimicking Donald Trump’s stimulus in the US — rather than keeping rates in negative territory.
“Negative rates are not a good idea, they are really bad for banks, and they are not good for savers,” Mr Kudlow told a panel this week, adding, jokingly, that Mr Trump disagreed with him because he would have benefited from ultra-low or negative rates when he was a real estate developer.
Additional reporting by Sarah Provan
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