On top of that, lending that cash can make banks less liquid, which increases their riskiness and elevates their cost of capital (the Q above).
Because banks adjust those interest rates for risk.
When the ECB rate dropped, outstanding floating rate lending rates also dropped (because floating rate lending is indexed on either the ECB base rate or on Euribor causing pressure on revenues.Healthy banks lend, dying ones dont.We don't see the typical feature of the self-fulfilling negative prophecy.The interest rate of the ECB deposit facility is supposed to help the central bank define a floor under which the overnight interbank lending rate (eonia) should not.(unless banks find worthwhile investments outside of the Eurozone, which wouldnt be dual currency deposit adalah of much help to prop up Euro economies).This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors.S.For media queries, please call William Lelieveldt.A counterintuitive (and controversial) approach to provide a boost to lending would be to subsidise even more the banking sector by increasing interest rates on both the refinancing and deposit facilities.IE then increases when the central bank deposit rate turns negative.Allianz Global Investors is a trademark, registered in various countries throughout the world, including the United States.The value of an investment and the income from it will fluctuate and investors may not get back the principal invested.And when a bank cut costs, it effectively reduces its ability to expand as it has less staff to monitor lending opportunities, and consequently needs to deleverage.Excess reserves) at another bank/ investment (which involves credit risk) for a lower rate.The euro is going to depreciate.An ECB risk-adjusted 0 can be worth more than a risk-adjusted 4 interbank deposit at a zombie/illiquid/insolvent bank.This interest income is more than welcome to (at least) maintain some level of accounting profitability (though not necessarily economic profitability) when economic conditions are bad and income from lending drops while impairment charges jump.But by increasing lending, absolute reserve requirements increase and banks have to transfer money from the deposit facility to the reserve facility.In a central banking environment, like Milton Friedman Id rather see the central bank manipulate interest rates solely through OMO-type operations.When the deposit facility rate is high, banks are incentivised to reduce their interbank lending exposures and leave their money at the ECB (and vice versa).
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