In an era of negative interest rates in Europe, monetary policy should not be geared towards appeasing the banking sector, BNP Paribas Chairman Jean Lemierre has said.
Speaking to CNBC’s Annette Weisbach at the BNP Conference in London on Thursday, Lemierre said the ECB (European Central Bank) was moving in the right direction with its latest rate cut and substantial bond buying package, but “can’t be alone” in efforts to stimulate the European economy.
“It is not easy, but our job is to adapt and monetary policy shouldn’t be designed for banks,” Lemierre said, adding that lenders should have the “appropriate business model in this environment by product and by region.”
“We need to reduce costs and we need to move more digital,” he suggested. “The banking sector should not be a toll on the economy, but a support to the economy.”
Rising rates are good for banks since it allows them to lend out money to investors at a profitable rate of interest. Lower interest rates restrict a bank’s ability to make profits, thus adding pressure on margins.
Negative interest rates, such as in Europe, penalize the banks for holding cash deposits at central banks. The current ECB deposit rate is -0.5%, the lowest on record.
However, Lemierre argued that the key to survival for European banks was “diversification.”
“You need many engines. If you have one engine and one business model you are stuck in the monetary policy. You need to be able to cross sell within a market and across the world,” Lemierre said.
“If you are able to do this – it is not easy, it is a lot of work, a lot of adaptation – but you can try to fly at the normal altitude.”
Speaking at the BNP Conference Thursday, ECB Vice-President Luis de Guindos echoed Lemierre’s comments, according to Reuters, by suggesting that the low profitability of European banks was structural, rather than a consequence of negative interest rates.