Socio-Economics History Blog

Socio-Economics History Blog

“NIRP is Killing Us,” Wheezes Spain’s Second Biggest Bank

by mosesman

Eurozone_Collapse

  • “NIRP is Killing Us,” Wheezes Spain’s Second Biggest Bank
    by , http://wolfstreet.com/  
    “Europe is caught in a trap.”
    In Europe, banks are beginning to feel the side effects from the ECB’s negative interest rate policy (NIRP), which (among other things) is meant to weaken the euro, fuel inflation, force banks into riskier lending, and prevent Eurozone economies from buckling under the sheer weight of their sovereign debt.
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    But it doesn’t work. Inflation remains much lower than the ECB’s target headline rate of 2%, European sovereign debt continues to grow at an alarming rate, and bank lending remains anemic in most countries. And it could actually end up killing the patient, Europe’s biggest banks.
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    That’s what Francisco González, Executive Chairman of Spain’s number-two financial institution, BBVA, just warned in a speech at the Spring Membership Meeting of the world’s most powerful financial lobby organization, the Institute of International Finance (IIF).
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    “Europe is caught in a trap,” he said. “It has to do something to boost its growth potential. But expansive monetary policy has led to negative interest rates, which are killing us.”
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    For BBVA, like most other European banks, the main problem with NIRP is the shrinking effect it has on its operating margins, which in turn puts unbearable pressure on its balance sheets. For example, when the Euribor is at zero, interest rates on variable rate mortgages are at next to zero. And these variable-rate Euribor-linked mortgages predominate in Spain’s mortgage market.
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    Until not so long ago, Spanish banks were insulated from this problem by the floor clauses they discreetly inserted into their mortgage contracts. These set a minimum interest rate — typically of between 3% and 4.5% — for variable-rate mortgages, even if the Euribor dropped far below that figure. That meant the banks enjoyed all the benefits of low-interest rate living with none of the drawbacks, which were exclusively reserved for Spanish mortgage holders.
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    All that changed in April when a Spanish judge ruled that the clauses were both abusive and lack transparency. The 40 banks implicated, including BBVA, now must reimburse clients all the money they’ve overcharged them since May 2013, and perhaps even since 2009. That could be as much as €10 billion. Also, as WOLF STREET reported at the time, in a delicious irony, all the banks that applied the floor clauses will now have to learn to survive without the one mechanism that protected them from the profit-shrinking effects of the ECB’s NIRP — just when the Euribor goes negative!
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    Cue Gonzalez’s public meltdown!
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    read more.

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