August 30, 2016 / 1:15 PM / 3 years ago

GRAPHIC-Euro zone banks have too much cash for their own good

* Excess liquidity to hit 1 trillion euros for first time

* Negative deposit rate has cost banks 2.6 bln euros

* Depositors face higher fees, charges

By Francesco Canepa

FRANKFURT, Aug 30 (Reuters) - In the strange days of negative interest rates, having one trillion euros ($1.13 trillion) more than you need can be a drag.

But that’s precisely how much euro zone banks will soon have parked at the European Central Bank, even though they must pay a punitive charge that is eating deep into their profits and forcing lenders to throw out old business models.

For related graphics on excess liquidity in the euro zone, click on and and

The charge on excess cash was introduced by the ECB in 2014 to force banks to stop hoarding cash and lend more, so boosting growth and inflation.

But most of that ever-growing cash pile comes from the ECB itself, which is printing 80 billion euros a month to lower borrowing costs. The new cash ultimately ends up in somebody’s bank account, so it is effectively trapped in the banking system, contributing to excess liquidity.

The negative deposit rate already cost banks 2.6 billion euros since 2014, according to Reuters calculations using ECB data.

Lenders’ reluctance to pass on the charge to depositors means their margins are shrinking, raising concern about their ability to cope with future shocks.

“Banks cannot fully offset this by cutting remuneration for depositors so their margins have suffered,” Marco Troiano, a director at Scope Ratings, said. “They need to cut costs and impose fees — both of which may cost them customers.”

Some lenders have already started to charge for basic services in markets where such fees were once taboo. Germany’s Postbank, a unit of Deutsche Bank, recently scrapped free current accounts for millions of customers.

“I think it is right that banks are discussing current account fees,” Bundesbank director Andreas Dombret told Reuters in an interview. “Banking services cannot be free if banks earn no interest margin.”

Several European lenders already charge corporate clients a percentage for large deposits and a small cooperative bank in the Bavarian Alps has introduced fees for wealthy retail customers.

Yet even more drastic measures could lie ahead if deposit rates stay at current or even more negative levels.

Economists have started to wonder at what point banks would simply start to hoard physical cash to avoid the penalty rate. Some Bank of England studies put this pain threshold at minus 0.5 percent, just 10 basis points below the ECB’s deposit rate.

When the ECB unveiled plans earlier this year to retire the 500 euro note, there was a public outcry in Germany, where many people saw the move as an attack on their ability to keep their savings in cash.

German and French banks hold two-thirds of excess liquidity, according to a Deutsche Bank analysis, while Italian and Spanish banks hardly have any excess reserves.

Economists have formulated several hypotheses to explain this pattern. They cite Germany’s strong exports to other euro zone countries, the prominence of French and German banks as financial brokers and both countries’ status as relatively safe places to park one’s money within the bloc.

Ultimately, most explanations revolve around the two countries’ superior economic health compared with their euro zone peers.

This acts as a magnet for cash and, combined with negative returns on much bank-to-bank lending, contributes to keeping it locked in the coffers of those firms at painfully high costs. ($1 = 0.8883 euros)

Editing by Catherine Evans

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