European Banks Rise As Markets Anticipate ECB Easing

Shares of European banks rose on expectations that the European Central Bank may be preparing to cut interest rates again.

Credit Suisse Group AG (ADR) CS was up 3.6 percent, Banco Santander, S.A. (ADR) SAN advanced 2.6 percent and HSBC Holdings plc (ADR) HSBC was up 2.3 percent.

"We are monitoring it on a regular basis and we are studying carefully the schemes used in other jurisdictions to mitigate possible adverse consequences for the bank lending channel. But I also think we need to qualify the narrative that banks' challenges flow largely from our monetary policy," ECB Executive Board member Benoît Coeuré said in a speech. Coeure is also the governor of the Bank of France.

A concern has built up that, as central banks lower interest rates into negative territory, the impact of monetary policy on banks is becoming increasingly adverse. That is because bank lending rates fall linearly but their funding costs are non-linear – as interest rates on retail deposits are sticky – which puts a squeeze on net interest margins.

However, Coeure pointed out that many banks have been able to more than offset declining interest revenues with higher lending volumes, lower interest expenses, lower risk provisioning and capital gains. Last year, for example, euro area banks' aggregate net interest income increased, especially as crisis-hit banks refinanced expiring high-yield liabilities.