Neg­a­tive rates to boost risky lend­ing: UBS CEO

The Pak Banker - - COMPANIES/BOSS -

UBS Group Chief Ex­ec­u­tive Of­fi­cer Ser­gio Er­motti said neg­a­tive in­ter­est rates are en­cour­ag­ing risky lend­ing prac­tices among some banks, po­ten­tially pos­ing a threat to the wider fi­nan­cial sys­tem. "Some banks are over-ex­tend­ing credit at con­di­tions that in my view may also cre­ate fu­ture po­ten­tial of risks in the sys­tem," Er­motti, 55, said in an in­ter­view on Wed­nes­day.

"There are banks that don't know what to do any longer with de­posits so ev­ery­body is try­ing to beat each other on pric­ing, and even­tu­ally this is go­ing to lead into a struc­tural deficit."

Euro­pean banks are seek­ing ways to shore up earn­ings as neg­a­tive in­ter­est rates cur­tail their abil­ity to charge higher in­ter­est on loans than they of­fer to pay on de­posits, while un­der­min­ing ap­petite from clients seek­ing to buy or trade de­riv­a­tives to hedge risks. Euro­pean Cen­tral Bank Gov­er­nor Mario Draghi is weigh­ing whether to use deeper neg­a­tive rates, which force banks to pay to de­posit funds, to fight against per­sis­tently low in­fla­tion.

Er­motti said risks could emerge in mort­gage lend­ing and other real-es­tate loans, where banks are ex­tend­ing credit to boost rev­enue. Lenders are also start­ing to charge fees on ser­vices that "used to be sub­si­dized by de­posits," the CEO said, call­ing de­posits "de facto a loss-mak­ing propo­si­tion."

ECB Ex­ec­u­tive Board mem­ber Benoit Coeure said at a con­fer­ence in Frank­furt, where Er­motti also ad­dressed the au­di­ence, that the cen­tral bank is mon­i­tor­ing the risks that neg­a­tive rates will hurt bank prof­itabil­ity.

"We are study­ing care­fully the schemes used in other ju­ris­dic­tions to mit­i­gate pos­si­ble ad­verse con­se­quences for the bank lend­ing chan­nel," he said. "We need to qual­ify the nar­ra­tive that banks' chal­lenges flow largely from our mon­e­tary pol­icy." In­vestors have fully priced in a 10 ba­sis-point cut in the de­posit rate to at least mi­nus 0.4 per­cent at the ECB Gov­ern­ing Coun­cil meet­ing on March 10. In Switzer­land, home to UBS and Credit Suisse Group AG, the cen­tral bank's de­posit rate is at a record low of mi­nus 0.75 per­cent.

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