* Warns of effects of further cuts on banks
(Adds detail; changes dateline (previous: Frankfurt)
By Michele Sinner
LUXEMBOURG Oct 3 Charging banks even more to
park their money with the European Central Bank could backfire
if the damage to the banking sector outweighs the benefit for
borrowers, ECB Executive Board member Yves Mersch said on
As part of its efforts to stimulate lending, the ECB has
been applying a penalty charge - or negative deposit rate - on
banks' excess deposits for over two years, triggering a backlash
from cash-rich banks especially in Germany.
Mersch defended the ECB's policy, saying it has helped bring
down unemployment and boost growth in the euro zone, but
acknowledged the banking sector would come under pressure if
rates were cut further.
"There is a limit to how low interest rates can go -- the
point at which the costs of lower rates incurred by the banking
sector outweigh the benefits," Yves Mersch said.
"Cutting interest rates even more would come with increasing
risks, as reactions to such cuts might not always be linear," he
Banking shares have sold off sharply in recent weeks as
worries about the impact of low interest rates on their profits
were compounded by the threat of a multi-billion-dollar fine
hovering over Germany's largest lender, Deutsche Bank
Mersch said that the ECB was cognisant of banks' woes, but
argued that lenders that cannot withstand a few difficult years
might not deserve to stay in business.
"One also has to ask if a bank that cannot weather headwinds
over a few years still has a sufficiently robust business model
to stay in the market," he said.
(Writing by Francesco Canepa in Frankfurt; Editing by Catherine
Evans and Toby Chopra)