Large European banks risk collapsing if interest rates in Europe remain negative in the foreseeable future, economists warned after the European Central Bank slashed rates.
The ECB cut its main deposit rate by 10 basis points to an all-time low of -0.5 percent and also unveiled a new tiering system designed to shield a proportion of banks’ holdings of excess liquidity from the negative rates.
Simon Baptist, the global chief economist at the Economist Intelligence Unit, told CNBC that the negative interest rate regime in the economic bloc, which is expected to last at least six more years, could hurt the banks’ profitability.
European lenders are bracing for deeper cost cuts and consolidations as the ECB extends a five-year stretch of negative interest rates, according to the Financial Times.
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Banking executives told Financial Times that the ECB was piling pressure on a sector already struggling to generate acceptable returns, leaving very little room for growth.
The ECB is expected to further cut rates in coming years. JPMorgan predicted that Europe could face eight more years of negative rates, increasing the likelihood of a global recession despite looser monetary policy from major central banks in the region.
