FRANKFURT - Super low rates are a boon for banks rather than a hindrance, European Central Bank (ECB) Vice President Luis de Guindos said on Wednesday, setting the tone for a debate on whether lenders should be compensated.
Banks have long complained that negative rates weigh on their profits, hurting the ECB's efforts to cut borrowing costs, and policymakers are expected next week to discuss possible compensation for lenders.
One idea under discussion is to exempt banks from the ECB's negative charge on some of their cash deposits held at the central bank by implementing a multi-tiered deposit rate.
"Negative rates have been behind the recovery of ... the European economy in the recent past and in that sense, it has been a helping hand in the profitability of banks," de Guindos told a news conference.
He added that more structural issues including a high stock of non-performing assets, excess capacity and high costs appeared to be the main reason for weak banking sector profits.
A tiered deposit rate -- a proposal that was discussed before being dismissed several years ago -- does not appear to enjoy widespread support among policymakers, many of whom have voiced scepticism.
Banking profitability is exceptionally low in the euro zone and de Guindos said returns will fall this year, recovering only slowly in the next two years.
The combined return on equity (ROE) of euro zone banks will fall below 6% in 2008 and rise above 6% percent again only in 2021, a level that is still considered low given the cost of capital and investor expectations.
Adding to stability risk, de Guindos said real-estate bubbles, a no-deal Brexit, and high government debt levels, particularly in Italy, were increasing stability risks for the bloc.
Italy's bond yields rose sharply this week as tensions between Rome and the EU Commision resurfaced, with Brussels considering a large fine in response to missed budget targets.
"The message is very, very clear: when tensions between the Italian government and (European) Commission come down, spreads narrow," de Guindos said. "If you have increasing tensions, you immediately have a widening of the spreads."
"The lesson is quite evident: it's very important to respect fiscal rules," he added.
Outlining risks in a biannual Stability Report, the ECB also warned that residential property markets were showing signs of mild overvaluation, a concern as the post-crisis decline in household indebtedness appears to have slowed significantly.
To slow the rise, the ECB raised the prospect that it could force banks to hold more capital, topping up national measures, such as countercyclical buffers.
"The ECB is monitoring property market developments too and may top up capital-based national macroprudential measures if needed," it added.
While the euro zone is relatively well prepared for Brexit, Britain's departure without a deal would dent economic growth and likely lead to sharp market swings as investors do not adequately price the risk of such a scenario, the ECB added.
"Combined with an impact via trade channels, potential financial market shocks related to a no-deal scenario pose a material downside risk to euro area GDP growth," the ECB added.