(Corrects date in 8th paragraph to 2019 from 2008)By Balazs KoranyiFRANKFURT, May 29 (Reuters) - Super low rates are a boon forbanks rather than a hindrance, European Central Bank (ECB) VicePresident Luis de Guindos said on Wednesday, setting the tonefor a debate on whether lenders should be compensated.Banks have long complained that negative rates weigh ontheir profits, hurting the ECB's efforts to cut borrowing costs,and policymakers are expected next week to discuss possiblecompensation for lenders.One idea under discussion is to exempt banks from the ECB'snegative charge on some of their cash deposits held at thecentral bank by implementing a multi-tiered deposit rate."Negative rates have been behind the recovery of ... theEuropean economy in the recent past and in that sense, it hasbeen a helping hand in the profitability of banks," de Guindostold a news conference.He added that more structural issues including a high stockof non-performing assets, excess capacity and high costsappeared to be the main reason for weak banking sector profits.A tiered deposit rate -- a proposal that was discussedbefore being dismissed several years ago -- does not appear toenjoy widespread support among policymakers, many of whom havevoiced scepticism.Banking profitability is exceptionally low in the euro zoneand de Guindos said returns will fall this year, recovering onlyslowly in the next two years.
The combined return on equity (ROE) of euro zone banks willfall below 6% in 2019 and rise above 6% percent again only in2021, a level that is still considered low given the cost ofcapital and investor expectations.Adding to stability risk, de Guindos said real-estatebubbles, a no-deal Brexit, and high government debt levels,particularly in Italy, were increasing stability risks for thebloc.Italy's bond yields rose sharply this week as tensionsbetween Rome and the EU Commision resurfaced, with Brusselsconsidering a large fine in response to missed budget targets."The message is very, very clear: when tensions between theItalian government and (European) Commission come down, spreadsnarrow," de Guindos said. "If you have increasing tensions, youimmediately have a widening of the spreads.""The lesson is quite evident: it's very important to respectfiscal rules," he added.Outlining risks in a biannual Stability Report, the ECB alsowarned that residential property markets were showing signs ofmild overvaluation, a concern as the post-crisis decline inhousehold indebtedness appears to have slowed significantly.To slow the rise, the ECB raised the prospect that it couldforce banks to hold more capital, topping up national measures,such as countercyclical buffers.
"The ECB is monitoring property market developments too andmay top up capital-based national macroprudential measures ifneeded," it added.While the euro zone is relatively well prepared for Brexit,Britain's departure without a deal would dent economic growthand likely lead to sharp market swings as investors do notadequately price the risk of such a scenario, the ECB added."Combined with an impact via trade channels, potentialfinancial market shocks related to a no-deal scenario pose amaterial downside risk to euro area GDP growth," the ECB added. (Editing by Alison Williams and Helen Popper)
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