Editorial: central bank logic and cautious banking



Where there’s a will there’s a way – talking about European Central Bank plan to drop deposit interests into the negative. Estonian experts don’t believe the step would impact deposits of the average saver: the sensitive client would simply withdraw his meagre money and stick it under mattress.

The ECB measure is aimed at making it preferable, for the healthier banks of Northern Europe, to lend money to their troubled Southern European peers. True, there’s certain logic to it: should keeping the money cause loss for a bank, better lend it to someone. Surely, by enhanced eagerness to lend by North-European banks, enterprises and households of the South would benefit as well. Thus; the idea might work.

Even so, considering the current interests – low as they are already, to the delight of receivers but not providers of loans – will the careful bankers behave as ECB expects? Forced to lend, as if, will they not rather opt to play it safe and pay a little extra instead? Realising that the negative cannot last for long, neither can ECB dive too deep «subzero». Concluding: could it so happen that the step intended to heat up lending will serve to add insecurity on financial markets, thus closing the loan taps even tighter? 

ECB activism is being explained, by analysts, as an attempt to avoid deflation hazard. As a surprise move at the beginning of the month, base rates were already lowered; obviously, though, this is not considered sufficient and thus extra options are being sought to activate the credit market. 

Though unaffected by the ECB idea, private savers would not remain altogether untouched – institutional investors, pension funds included, would then have to pay extra. In the longer perspective, future pensions would be affected.

Of course, negative interests would be an extraordinary and temporary measure. And the current scepticism by bank bosses should not be taken totally at face value: they do not want to pay anything, of course. Even so, when making plans in the fragile and hardly balanced financial sector, one should be careful rather than enthusiastic. Estonian banks are of the opinion that this is an attempt by ECB to enforce indirect taxation on money market – some say that, if this be the aim, more transparent to use budget policy measures for that. And they are right. Still, that would again take political agreements... and ECB does not seem to consider achievement of these achievable and timely, at the moment.

Meanwhile the US FED is weighing the option of lowering interests taxed from central bank reserves. America’s banks have already issued a warning: for them, this would mean taxing their clients. Thus, in the worst case scenario, another snowball may form. The last ball took the jobs. The new ball will take money flows from US and Europe.