The CEOs of Germany’s two biggest banks have warned of further damage to the ailing European banking sector and wider economy if the European Central Bank (ECB) cuts interest rates next week.
Meanwhile, American banking giant Goldman Sachs told CNBC its business model insulated it from the risk of a low interest rate environment.
Revenues at the world’s largest investment banks plunged to 13-year lows in the first half of 2019, according to the latest data from industry monitor Coalition. Geopolitical tensions, sluggish growth and persistent low interest rates compounded structural problems which have beleaguered the sector since the financial crisis.
ECB officials have offered conflicting messages as to whether the central bank will announce a substantial package of monetary easing measures at its policy meeting on September 12. These have been mooted to include a change in forward guidance, rate cuts, a tiered deposit rate and recommencing asset purchases.
Speaking at the Handelsblatt Banking Summit in Frankfurt on Wednesday, Deutsche Bank CEO Christian Sewing and Commerzbank CEO Martin Zielke both cautioned that a further cut in interest rates would risk serious side effects while only minimally impacting the economy.
Sewing claimed his bank’s customers say they would not invest more if credit were 0.1% cheaper, and argued that a rate cut would “only drive up asset prices and further burden savers,” according to a Reuters translation.
Addressing the summit later in the day, Zielka said the low rate environment was not a “sustainable, responsible policy.”
Banks in Germany and throughout Europe have long bemoaned the ECB negative interest rate policy which forces banks to pay to park their cash with the central bank, squeezing profits. Banking CEOs and CFOs over the summer queued up to highlight the negative effect of the policy on their first-half results.
Goldman Sachs not concerned by low rates
However, across the pond, some Wall Street giants, such as Goldman Sachs, have assured that they will have greater resilience to the combination of geopolitical and economic headwinds.
Goldman Sachs CFO Stephen Scherr told CNBC’s Annette Weisbach on Thursday that the bank’s business model had insulated it from the obstacles facing many of its European and domestic rivals.
“It’s less of a concern for us just given the nature of our business model – meaning the way in which we fund and the floating rate nature of the assets doesn’t lead to the kind of concern that other big commercial banks would have,” Scherr said.
“But if you look at major money center banks in the U.S., as you do big money center banks here in Europe, they all have anxiety about the prospect of ever lower rates and the inability to generate assets sufficient to meet their cost of capital and their cost of funding.”
Money center banks are those whose borrowing and lending activities are primarily with governments, large corporations and regular banks, rather than consumers.
The European banking sector has long faced calls for consolidation in order to attain the levels of profitability needed to challenge its Wall Street counterparts, and a major merger between Deutsche Bank and Commerzbank fell through earlier this year.
Deutsche Bank and UBS executives have also been reported to have held talks on a potential tie-up for their asset management units.
Scherr said the European banking industry “certainly could use consolidation” but that it was unlikely that Goldman Sachs would play a role.
“I think American banks are by and large quite content in the markets in which they sit, but I do think that consolidation in this market is necessary,” Scherr told CNBC.
“And I think some realization of a bank union is needed in order to facilitate that. At the moment you have multiple flag banks and it’s become quite challenging for them to find the opportunity to engage in consolidation.”