Digital assets: further pressure on the bank profits

crypto-assets such as Bitcoin threaten the dominance of official currencies. Many countries therefore expect to introduce them. China has already done this and pushed McDonald’s to install e-renminbi payment systems in more of its restaurants there. Unfortunately, the digital currencies of the central banks will continue to push the incomplete profits of the commercial banks.

The return on equity that rarely exceeds for European banks, according to a study by experts from central banks such as the European Central Bank, the Federal Reserve and the Bank of England, could take a slump in almost 1 percentage point. That would be a severe blow to profitability, since the average ROE in the developed world was 8.9 percent in the period 2000-2016.

The reason? In order to counter the popularity of cryptos, the digital currencies of the central banks should also be popular. The central banks are planning to offer deposit accounts at conditions that are good enough to attract normal citizens. You can imagine the loud suction noise when cash flows from the deposit accounts of high-street banks such as Barclays, BNP Paribas and Germans. These lenders are dependent on deposits as cheap, reliable source of financing.

The study estimates that wholesale financing could increase to two thirds of the banking liabilities, compared to about a third today. One difficulty is that the credit markets can dry out in a crisis. This was the main reason for the collapse of the British Bank Northern Rock in 2008. Another catch is that the financing by major customers is more expensive than customer deposits, especially if demand increases.

The study estimates that commercial banks have to raise the loan interest to up to 70 basis points in order to close the gap in the net interest income. But as Joachim Klement from Liberum emphasizes, there could be a kink in the thinking of the central bankers. If the lending becomes less profitable - for example, when the key interest rates in Germany and Switzerland become negative - commercial banks will become increasingly reluctant to lending. Your customers are simply too resistant to higher interest rates.

That would mean that the central banks would have disturbed the commercial banks to distribute cash and manage loans even more radically than expected. The head that carries and plans to keep it is uncomfortable to keep it.