Bundesbank chief Jens Weidmann warns of upside risks to interest rates

European Central Bank’s (ECB) most hawkish and one of the most respected and reputed central bankers, Bundesbank chief Jens Weidmann has warned against the sharp reversal in global interest rates and warned that they could pose serious risks to banks. He has been a sharp critique of negative interest rates and has been warning of the adverse consequences that may arise from such a policy. However, when German leaders criticized European Central Bank’s (ECB) dovish policy he sided with the ECB, stressed upon its independence and said that the ECB is right in keeping its monetary policy loose though there could be differences over specific measures.

An EU-wide stress test recently found that German financial system and its banks are suffering the consequences of negative interest rates. They have benefited from low non-performing assets in their balance sheet due to strong German economy but suffering from structural low profitability. He warned against the bond purchases saying that if the purchases focus too much on a highly indebted country, the monetary policy runs the risk of moving into the realm of fiscal policy.

He stressed the importance of implementing the burden sharing rules that impose losses on shareholders and depositors before public money is used to bailout lenders. Recently Italy has been trying to bend the rules to rescue banks. But Mr. Weidmann said, “If the government artificially keeps these banks alive and investors risk decreases, then that is a losing proposition for taxpayers………It is also bad for the economy because ailing financial institutions can provide less credit or possibly try to save themselves through high-risk transactions. A government rescue for all parts of the financial system incentivizes excessive risks.”