The decision of ECB for deeper negative interest rates on excess reserves will put pressure on the revenues of banks in the eurozone and in Bulgaria as well. The effect felt by Bulgarian banks will be even stronger for several reasons.

First of all, excess reserves of banks in the eurozone are slightly over two percent of the total assets, whereas in Bulgaria they account for around eight percent of the total assets of the banking sector. All other things being equal, it means that negative interests in Bulgaria will cost banks a greater loss of net interest income than in the eurozone.

Second, the credit structure in the eurozone contains more fixed-interest loans unlike Bulgaria where almost all loans are with a floating interest. This is important as it means that banks in the eurozone will have more options to increase rates on fixed-interest loans in order to compensate for the negative effect on their interest revenues as a result of negative interest rates on excess reserves. In Bulgaria this option for banks to pass the effect from negative interests on excess reserves onto their end customers practically does not exist.

The third factor which will put negative pressure on interest revenues in Bulgaria to a greater extent than in the eurozone is related to the structure of liabilities. In the eurozone, retail deposits form a smaller share in the total liabilities of banks. This matters as banks don’t dare try negative rates on this category of liabilities and thus the latter remains isolated from the downward movement of interests on all other types of assets and liabilities. A circumstance which will mitigate this effect is the fact that interest rates on retail deposits in Bulgaria are still higher than those in the eurozone. The space for further decrease of interest rates on retail deposits is already very small.

Last, and maybe most important is to point out that the measures which ECB has introduced to enable banks in the eurozone to protect themselves against the unfavorable consequences of negative rates on excess reserves, are unavailable to Bulgarian banks. In particular, Bulgarian banks will not be able to immediately benefit from the quarterly auctions at which ECB will provide four-year loans to banks at negative interest rates, which will reach the lowest levels of 0.4% p.a., i.e. exactly as much as the negative interest rate on excess reserves. Thus, it seems that one more time Bulgaria is in a situation where it suffers disadvantages but cannot get full access to the benefits which eurozone membership can offer.

It is important to remind that the interests on loans and deposits in the eurozone and in Bulgaria as well are determined by a number of factors which can exert influence in a number of directions and the decision of ECB is only one of those factors.

In general Bulgarian banks are better placed to face the challenges coming from the policy of negative interest rates on excess reserves of ECB than those in the eurozone. Besides, ECB gave a clear sign yesterday that it is aware of the negative side effects which the policy of negative rates on excess reserves has on banks’ revenues and is ready to take additional compensatory measures if that proves necessary.

More information for media:

UniCredit Bulbank, Identity & Communications Department

Viktoria Blajeva, Phone: + 359 2 9264 993, wjlj/ebwjepwbAvojdsfejuhspvq/ch