Large banking institutions face the risk of failure if interest rates in Europe continue to stay negative, according to this economist.
"I think there are big questions to banking sector profitability," global chief economist of the Economist Intelligence Unit, Simon Baptist, said Friday.European banks have struggled for years in a persistently low interest rate environment. Rates in the Euro zone first hit zero in 2012 and turned negative in 2014. Low interest rates hurt lenders' profits as they narrow the margin that banks can earn.
The ECB last week lowered the interest rate that lenders receive for depositing money with the central bank, pushing it further below zero. That essentially means the central bank raised the amount it charges lenders for the excess cash they hold on to overnight.which exempts a portion of the bank deposits from those charges.said that under this arrangement, "part of banks' holdings of excess liquidity will be exempt from the negative deposit facility rate.
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